Period  1Q14/3M14

Actual vs. Expectations The reported net profit of RM142.7m (-14.5% QoQ & -5.4% YoY) accounted for only 21.3% and 21.7% to our full-year forecast and consensus of RM670.1m and RM658.0m, respectively.

 While the 1Q could be seasonally weaker (earnings in 1Q13 accounted for 23.2% of full-year earnings of FY13), we deem this set of results lower-than-expected judging from the weaker top-line growth and higher operating expenses.

Dividends  None, as expected.

Key Results Highlights

1Q14 vs. 1Q13

 The total income was almost flat with a -0.3% YoY change, dragged down by a 1.1% YoY decline in interest income due to continued NIM contraction of 18bps, as per our estimate, despite a decent gross loan growth of 10.1% (which is inline with our low-teen growth assumptions of 10%-12% for FY14-FY15E).

 The growth in gross loan was driven predominantly by non-household segment. While lending to residential properties grew 13.9% YoY, household loan only grew 6.7% YoY. SME accounted for 16.7% of total loan and grew at a faster rate of 14.9% YoY.

 Customer deposits, on the other hand, expanded at a slower rate of 8.1% YoY. As such, the Group’s gross Loan-to-Deposit ratio (LDR) increased to 82.8% as at end-Mar 14 (vs. 81.3% in 1Q13 and 79.1% in 4Q13).

 The lower bottom-line was due mainly to higher operating expenses (+4.6% YoY) and share of losses in jointly controlled entities. In 1Q14, costto-income ratio (CIR) increased to 48.6% from 46.3% in 1Q13.

 The above negative developments were cushioned marginally by net writebacks of RM6.3m. However, we are concerned over the sustainability of the trend of writebacks even though the gross impaired loan (GIL) ratio for the Group further improved to 1.92% (vs. 1.98% as at end-Dec 13 & vs. 2.22% in end-Mar13). This is because the impaired loan loss coverage (LLC) only stood at 76.0% (vs. 74.4% in 4Q13 & 70.9% in 1Q13) which was lower than industry average of >100%. Besides, these writebacks could gradually normalise as they declined 52.2% YoY and 79.7% YoY.

 At Affin Bank level, the Tier-1 Capital and Total Capital ratios were recorded at 11.8% and 12.7% (vs. 11.2% & 13.0% in 1Q13 and 11.0% & 12.6% in 4Q13).

 Annualised ROE stood at 8.8% and it was marginally lower than management’s target of 9.2%.

Key Results Highlights

1Q14 vs. 4Q13

 The Group reported a lower net profit of RM142.7m (-14.5% QoQ) due to weakness across both top and bottom line items.

 Total income declined 2.7% QoQ on the back of decline in net interest income (-4.2% QoQ) and noninterest income (-1.6%). Amid increasing competition, NIM continues to come under pressure. Based on our estimate, NIM could have contracted by 8bps during the quarter.

 While CIR declined to 48.6% (from 51.2% in 4Q13), the lower writebacks (-79.7% QoQ) and share of losses in jointly controlled entities were the main culprits for the sharp decline in profitability.

Outlook  While we have been adopting a conservative stance, this set of results is still somewhat weaker than expected.

 We have under estimated the degree of NIM compression and the stickiness of operating expenses despite being spotted on in loan growth.

 Until synergies of the merger with Hwang-DBS materialise, we reckon that the Group may need to undergo a period of gestation.

 Of late, the Group has also proposed to undertake a rights issue to raise RM1.25b to fund the acquisition of the investment banking, asset management and futures dealing assets of HwangDBS (M) Bhd and inject capital into Affin Bank Bhd. Based on the current share price and a minimum 25% discount of right issue price to theoretical ex-rights price, we reckon the rights could be issued on a basis of 1:3.

 The dilution in rights could potentially further dampen its EPS growth, which explains the recent weakness in share prices.

Change to Forecasts Due to the weaker set of results, we have fine-tuned our earnings estimates.

 We are factoring in a more aggressive NIM compression of 16bps-5bps in FY14-FY15E vs. 7bps-0bps previously. On CIR front, we also raise our CIR estimates from 46% for FY14-FY15E to 48.0%-47.1%.

 As a result, our FY14-FY15 earnings estimates have been revised to RM611.4m (-5.9% YoY)-RM651.2m (+6.5% YoY) from RM670.1m-RM727.9m, representing downward revisions of 9%-11%, respectively.

 Due to lower profitability, we also revised down our DPS estimates from 15.0 sen for FY14-FY15E to 12.0 sen.

 Based on these estimates, ROE is expected to register at 9.3% in FY14 and 9.2% in FY15, which are inline with the management’s 2014 Target ROE of 9.2% before rights issue.

Rating  Maintain MARKET PERFORM even though share price has retraced ~12% from its year-high of RM4.17.

Valuation  We revise our Target Price (TP) lower to RM4.00 from RM4.60 previously on (i) weaker results and lower earnings estimates as well as (ii) potential dilution from rights issuance.

 Our TP is based on 0.8x to its FY15e book value (implying a FY15 PER of 9.2x) on the back of 9.2% ROE. Note that the stock had been trading in the range of 0.8x-0.9x PBV when its ROE was hovering around 9.4%-9.8%.

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