Period  2Q14/1H14

Actual vs. Expectations 2Q14 net profit of RM112.0m brought 1H14 net profit to RM254.7m.

 This is below expectations; accounting for 42% and 39% of our full-year forecast and street numbers, respectively.

Dividends  As anticipated, no dividend was declared since our last results note.

Key Results Highlights YoY, 1H14 net profit fell by 17.9% due in part to an uninspiring 1.6% growth in net interest income

(NII), to RM458.3m, as net interest margin (NIM) slipped 8bps. Growth in Islamic banking income, however, was decent (+5.2%), while non-interest income (NOII) advanced by an excellent 39.2%. As a result, total income still managed a double digit 11.7% growth to RM841.4m.

 Notwithstanding this, the YoY growth of net profit stumbled into negative territory on: (i) a higher cost-to-income (CI) ratio of 52.4% (+6.4ppts), and (ii) the incurrence of an allowance for loan impairment of RM22.5m (1H13: write-back of RM30.7m).

 Gross loan-to-deposit ratio retraced 2.3ppts to 81.0% (-1.8bps QoQ), as deposits growth of +9.6% (+2.2% QoQ) outpaced that of gross loan’s +6.6% (-0.01% QoQ). Current and savings account deposits (CASA) to total customer deposits also fell, but by a slighter 0.4bps to 19.9% (-2bps QoQ).

 On the upside, asset quality was better with gross impaired loans (GIL) ratio dropping 0.2bps to 1.91% (flat, QoQ). Coupled with the allowance for impaired loans provided for this quarter, loan loss coverage (LLC) ratio improved 1.6ppts YoY to 75.3% (-0.7bps QoQ) while annualised credit charge off rate was 15bps.

 Total capital ratio (at the Affin Bank level) remained above Basel III’s total capital requirement of 10.5% (by Jan 2015), and was largely unchanged at 12.7% (-1.0bps YoY; -0.2bps QoQ) despite Tier-1 capital ratio inching up 87.6bps to 11.8% (4.5bps QoQ), and

 Annualised return on equity (ROE), on the other hand, was 2.1ppts lower at 7.8% (-1.0ppt QoQ), a consequence of the lower net profit.

 QoQ, 2Q14 net profit was down 21.5% despite good sequential growth recorded in NII (+9.3%), Islamic banking income (+3.3%), and NOII (+80.7%). Hence, total income was higher by a commendable 26.7% to RM470.3m. Main contributors to the slack in net profit were: (i)

an increase in the CI ratio to 55.3% (+6.7ppts), (ii) the incurrence of an allowance for loans impairment of RM28.8m (1Q14: write-back of RM6.3m), and (iii) a jump in finance costs (+154.8%).

Outlook  2H14 could see seasonally better numbers. However, an increasingly competitive environment could put a cap on potential loans and deposits growth.

 NIM could also see further compression especially if a second hike in the overnight policy rate were to materialise.

 Hence, expect increasing focus to be directed towards the growth of NOII which is showing promise.

 CI ratio may continue trending upwards on possible operational redundancies post-Hwang IB acquisition.

 LLC ratio is still in need of beefing up, and this quarter’s provision for impaired loans could get the ball rolling.

 Meanwhile, ROE may fall short of management’s target of 9.5% given the dilutive effect of the right issue completed in June 2014.

Change to Forecasts

 In view of the above, we revise downwards our FY14E and FY15E earnings estimates by 13.1% and 7.4%, respectively.

Rating  Maintain MARKET PERFORM

Valuation  Our target price (TP) is now a lower RM3.55 (from RM4.00), which was derived based on a price-to-book (PB) ratio of 0.8x. This implies a price-to-earnings (PE) ratio of 9.5x.

 The PB ratio applied is based on the group’s share price performance which traded in the range of 0.8x-0.9x PBV when its ROE was hovering around 8.1%-9.8%.

Risks to Our Call Tighter lending rules and slower loan growth,

 Keener competitions and hence further margin squeeze

 Sharp reversal in the trend of declining non-performing loans, hence higher credit charges.

Source: Kenanga