Period  4Q13/12M13

Actual vs. Expectations We were spot on AFFIN’s FY13 net profit. The reported net profit of RM650.0m accounted for ~100% to our earnings estimates of RM648.7m. The FY13 net profit was 5% higher than the consensus estimate of RM617.6m.

 Again, the better profitability was driven mainly by writebacks/reversals of loan impairment instead of the top line growth.

Dividends  No dividend was declared for the quarter as the Group had already declared a 15 sen DPS in the previous quarter (vs. 15 sen in FY12).

Key Results Highlights

FY13 vs. FY12

 The total income was flat with a 0.2% YoY growth rate, dragged down by a 5.0% YoY decline in noninterest income due to lower investment income. For the year, net interest income (+2.2% YoY) and Islamic banking income (+1.8% YoY) were the main earnings driver.

 Total loan grew 7.9% YoY, predominantly in the corporate and SME segments, which accounted for 52.8% of the total loans and grew 9.5%. Other stronger loan growth drivers were hire purchase (+12.0%), residential mortgages (+15.1%) segments. The loans growth is somewhat in-line with our FY13E loan growth of 7.7% but slightly below management guidance of 9%-10%. NIM, on the other hand, dipped 8bps as per our estimate.

 Customer deposits expanded at a faster rate of 10.3% YoY. As such, the Group’s gross Loan-to-Deposit ratio (LDR) declined to 79.1% as at end-Dec 13 compared with 80.9% as at end-Dec 12.

 Cost wise, cost-to-income ratio (CIR) inched up marginally to 47.0% from 46.0% in FY12.

 As mentioned earlier, the Group recorded RM66.1m writebacks (arising from the removal of the transitional provision on collective evaluation of loan impairment by BNM in year 2012 and higher recoveries in 4Q13) as opposed to RM18.8m writebacks/reversals of impairment in FY12, resulting in operating profit growth of 4.1% YoY.

 However, we are concerned over the sustainability of the trend of writebacks even though the gross impaired loan (GIL) ratio for the Group stood at 1.98% as at end-Dec 13 (vs. 2.03% in end-Dec 12). This is because the impaired loan loss coverage (LLC) only stood at 74.4% (vs. 75.4% in 4Q12) which was lower than industry average of ~107%.

 At Affin Bank level, the Tier-1 Capital and Total Capital ratios were recorded at 11.0% and 12.6% (a slight dip from 11.3% and 13.3% as at end-Dec12).

 The FY13 ROE of 10.3% is pretty much within our expectations (of 10.4%).

4Q13 vs. 3Q13

 The Group reported a lower net profit of RM166.9m (-3.5% QoQ) despite recording RM30.8m writebacks/reversals during the quarter due mainly to: (i) increase in overheads expenses (+11.2% QoQ) as well as (ii) the reduction in both net and non interest incomes (-3.6% & -1.9% QoQ respectively).

 Amid increasing competition, NIM continues to come under pressure. Based on our estimate, NIM could have contracted by 14bps during the quarter.

 Following the surge in operating expenses, CIR spiked to 51.2% as opposed to 44.8% in 3Q13.

Outlook  Our view remains unchanged.

 While the growth of the Group could again be driven by net writebacks for the year, we are concerned over its sustainability. We notice that its LLC was still lower than industry average. As such, this underlying trend of writebacks could be vulnerable if and when (i) interest rates start rising or (ii) the economy direction turns volatile from extreme external factors. Besides, we also suspect that such lower-than-industry LLC could be due to its large exposure in corporate loans component of the larger lumpy nature of corporate loans of ~37% (ex-SME exposure of ~16%) in contrast to a relatively smaller household loan portfolio that only accounted for 40% of total loan (vs. industry average of ~50-55%).

 We also continue to believe that loans growth prospect is getting tougher while NIM will be inevitable under pressure. While we have factored in low-teen growth of 10%-12% in FY14-FY15, we do not rule out a potential downward revision if and when credit growth is proven weaker than expected.

 While non-interest income could spike after the completion of merger with Hwang Investment bank in 2Q14, the merger synergies may not emerge during the initial stage of integration.

Change to Forecasts We maintain our FY14 earnings estimates of RM670.1m for now. At the same time, we also introduce our FY15 net profit estimate of RM727.9m. Based on these estimates, ROE is expected to register at 10.4% in FY14 and 10.0% in FY15, which are above the management’s 2014 Target ROE of 9.2%.

Rating  Maintain MARKET PERFORM.

Valuation  Our Target Price (TP) remains unchanged at RM4.60 (implying 9% upside from here).

 Our TP is based on 1.0x to its FY14e book value or at 10.2x its FY14E EPS of 44.9 sen. These price multiples represent their respective +1SD-level (1-standard deviation above 3-year average mean).

Risks to Our Call

 (i) Tighter lending rules and slower loan growth, (ii) Keener competitions and hence further margin squeeze; and (iii) sharp turn in the trend of declining NPLs, hence higher credit charges.

Source: Kenanga