Sng Seow Wah, in Oct 2014, Joel Kornreich took to the helm on 1 Jan 2015. This could mean some changes in the strategy of the Group moving forward. However, there is no indication yet as to whether this will be the case. Hence, it is business as usual for now. Performance-wise, the Group’s recent 9M15 results met our expectation, at 76% of full-year estimate. Aside from possible one-offs, which seem to be a common feature in the last two years, we are not expecting any major surprises in the coming 4Q15 results. As such, we keep AFG at MARKET PERFORM.

New head on board. On 5 Jun 2014, AFG announced the decision of its then Group Chief Executive Officer (CEO), Sng Seow Wah, not to renew his employment contract (and to also relinquished his position as Director of AFG, Alliance Bank and Alliance Investment Bank Berhad). The announcement came one month prior to the end of Sng’s tenure with AFG on 4 Jul 2014. Sng’s tenure was subsequently extended for a period of three months to 4 Oct 2014, as the search for a suitable successor continued. Two month after Sng’s departure, Joel Kornreich was appointed Group CEO on 12 Dec 2014. His tenure began on 1 Jan 2015.

Change in the Group’s focus? We had the pleasure of hearing from Kornreich in person during the results briefing held early last week. However, there was no mention of changes in AFG’s strategic focus, which is a possibility whenever a new head comes on board. Nevertheless, it is still early days under Kornreich’s stewardship. Hence, we do not discount that changes could eventuate in the nearto mid-term. Furthermore, Kornreich takes office during challenging times where margin compression, amongst others, has become the order of the day. In AFG’s case, the persisting margin compression is likely the result of the replacement of higher yielding co-op loans with lower yielding mortgages and intensified competition to shore up on deposits ahead of the implementation of Basel III liquidity coverage ratio in Jun 2015. Therefore, any changes in strategy could possibly involve varying funding sources (to contain escalating cost of funds) and diversification into selective higher yielding segments (to improve portfolio yield).

Latest results met expectations. In terms of fundamentals, AFG has been performing within our expectation. Its latest 9M15 earnings accounted for 76% of our full-year forecast (RM551.7m), while broadly meeting that of consensus’ at 72% (RM583.5m).

Strong loans growth but credit cost is up. Essentially, 9M15 (est.) core net profit grew 4.7% to RM418.5m after stripping off a nonrecurring land sale gain (RM21.6m), bancassurance fee (RM10m), and mutual separation scheme (MSS) costs (RM10.6m). Growth was mainly attributable to a robust increment in net interest income (NII) (+13.3%) to RM1.34b on loan book expansion, despite an easing in net interest margin (NIM) to 2.21% (-5bpts). Islamic banking income (IBI) (+4.8%) and non-interest income (NOII) (+1.3%) also registered increments, edging total income up to RM1.08b (+6.9%). However, growth at the net profit level decelerated in response to an increase in loan loss provisioning (+>100%) on higher collective assessment from loans growth. Nevertheless, the deceleration in net profit was capped by a lower cost-income (CI) ratio of 44.8% (-29bpts) (target: 45-48%) as personnel cost (-3.2%, upon exclusion of the one-off MSS cost) and establishment costs (-0.8ppts) declined. Meanwhile, excess liquidity was smaller with gross loans-deposit (LD) ratio inclining 2.4ppts to 86.1% (industry: 81.2%), as gross loans growth of +16.3% (industry: +8.7%) outpaced that of deposits’ +13.0% (industry: +7.6%). Gross impaired loans (GIL) ratio, on the other hand, dropped 39bpts to 1.14% (industry: 1.66%), indicating better asset quality, on the Group’s continuing efforts to refine the credit origination process and credit scoring models, as well as on intensified collection. Coverage was also beefed up with loan loss coverage (LLC) ratio growing to 94.2% (+2.9ppts). Meanwhile, annualised credit write-back ratio stood at 8bpts (+6bpts).

Lower core net profit on a sequential basis. Sequentially, 3Q15 (est.) core net profit fell 26.1% largely owing to a retracement in NOII to RM68.0m (-27.2%), upon the exclusion of the one-off land sale gain in 2Q15 and the bancassurance fee in 3Q15. NII, on the other hand, was little changed at RM459.1m (+0.3%) as NIM dropped to 2.21% (-22bpts), while IBI increased by 8.1%. Consequently, total income came in 7.8% lower to RM339.8m. The decline ramped up the bottom line as: (i) the CI ratio increased to 46.0% (-2.5ppts) on sticky establishment, marketing and administration costs, and (ii) on the incurrence of RM27.0m in loan loss provision vs. RM6.6m in write-backs during the previous quarter.

Maintain MARKET PERFORM. All in, it is business as usual for AFG. For the final quarter of FY15, we are not expecting any major surprises aside from possible lumpy one-offs which seem to be a common feature in the last two years. As such, we continue to maintain MARKET PERFORM on the Group with an unchanged target price (TP) of RM4.97. We derive our TP based on a blended FY16 Price-Book (PB)/Price-Earnings (PE) ratio of 1.7/12.7x, given that the group’s share price performance had always traded range bound between 1.6-1.7x PB ratio and of 12.7x PE ratio with return on equity coming in between 13%-14% and loans growth of between 11.5%-14.0%. 

Source: Kenanga