Period  3Q14/9M14

Actual vs. Expectations  3Q14 net profit of RM142.0m brought 9M14 net profit to RM396.7m.

 This is within our expectation; making up 75% of our full-year forecast (RM531.6m).

Dividends  A first dividend of 15.0 sen/share was declared in respect of FY14 (FY13: 15 sen).

Key Results Highlights YoY, 9M14 net profit fell by 17.9% despite a robust 17.7% advancement in total income to RM1.3b (85% of our forecast), with all income segments of net interest income (NII) (+2.0%), net income from Islamic banking (IBI) (+6.8%), and non-interest income (NOII) (+60.8%) recording gains. The growth in net interest income was likely attributable to loan book expansion, as net interest margin is estimated to have slipped 18bps.

 Changes in line items after total income were not so rosy causing gains to be more than offset at the net profit level. Main factors contributing to the decline were: (i) a jump in the cost-to-income (CI) ratio to 54.9% (+9.3ppts) likely relating to the integration of Hwang IB, and (ii) the incurrence of a loan impairment allowance of RM35.2m (vs. a writeback in 3Q13). Other non-favourable changes include higher non-operating losses (+>100%), and a higher effective tax rate of 25.1% (+1.2ppts).

 Gross loan-to-deposit ratio continued its retracement, dropping 90bps to 80.7% (industry: +82.1%), as deposits growth of +10.2% (industry: +5.9%) outpaced that of gross loans’ +8.8% (industry: +9.0%). Meanwhile, current and savings account deposits (CASA) to total customer deposits inched up 60bps to 20.4%. All of these seem to be the reverse of what we have seen with other banks.

 Asset quality was better again with gross impaired loans (GIL) ratio dropping 12bps to 1.91%. Loan loss coverage (LLC) ratio also improved 1.2ppts to 76.6% (industry: >100%), while annualised credit charge ratio was at 13bps (vs. a credit write-back ratio of 5bps in 3Q13).

 Common equity tier 1 (12.36%), tier 1 (12.36%), and total capital (13.51%) ratios remained above their respective fully loaded requirements of 7.0%, 8.5%, and 10.5%, respectively.

 Annualised return on equity (ROE), on the other hand, was 2.9ppts lower at 7.2% as a consequence of a larger share base post-right issue (RI) which was completed on 10 Jun 2014.

 QoQ, 3Q14 net profit grew by a commendable 26.8% due in part to sequential growths recorded in NII (+1.8%), IBI (+3.9%), and NOII (+16.3%). Hence, total income was higher by a healthy 7.4% to RM505.2m.

 Growth at the net profit level accelerated on: (i) lower finance costs (-50.4%) and (ii) a fall in the effective tax rate to 23.8% (-5.1ppts).

 Potential growth, however, was capped by a higher CI ratio of 59.1% (+3.8ppts).

Outlook  NOII growth has been encouraging post-Hwang IB acquisition, which was the main growth driver in 3Q14.

 However, the consequent higher cost structure should continue to put downwards pressure on AFFIN’s bottom-line. Hence, we expect declines in net profit to continue into the next quarter.

 We have assumed that the CI ratio will inch up further (to c.50.5%) in the coming quarter, before retreating slightly in FY15.

 NIM should see further compression in anticipation of a second hike in the overnight policy rate next year, and overall softer demand for loans.

 ROE (7.2% as of 9M14) is almost certain to fall short of management’s target of 9.5% given the dilutive effect of the right issue completed in June 2014.

Change to Forecasts No changes to our FY14 (RM531.6m) and FY15 (RM603.1m) earnings estimates.

 However, following the completion of the RI, we fine tune our target FY14 and FY15 earnings per share (EPS) to 27.6 sen (-23%) and 31.4 sen (-22%) respectively, our estimated FY14 and FY15 book value per share (BVPS) to RM3.64 (-19%) and RM3.80 (-21%), as well as our forecasted FY14 and FY15 ROEs to 7.9% (-2%) and 8.3% (-5%), respectively.

Rating  Maintain MARKET PERFORM

Valuation  Following the revision in our target FY15 EPS, BVPS, and ROE, we adjust downwards our target price (TP) to RM2.94 (from RM3.55).

 We arrive at our TP by applying a blended FY15 price-book (PB) ratio of 0.80x (lowered from 0.81x), and an unchanged price-earnings (PE) ratio of 9.1x.

 The slightly lower PB ratio applied is based on the group’s historical share price performance which traded in the range of 0.8x-0.9x PB ratio when 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