Period  4Q14/FY14

Actual vs. Expectations  4Q14 net profit of RM208.6m brought FY14 net profit to RM605.3m.

 This exceeded expectations, making up 115/110% of our/consensus full-year forecast.

 The better-than-anticipated results came as non-interest income (NOII) rose strongly (+62.3%) post merger, thus cushioning the potential decline in FY14 earnings.

Dividends  While no dividend was declared as expected, full year dividend was maintained at 15.0 sen, despite a lower net profit achieved (FY14: RM605m vs. FY13: RM650m).

 This met our 15.0 sen forecast for FY14, and represents a pay-out of 43% (FY13: 33%).

Key Results Highlights  YoY, FY14 net profit fell by 6.9% despite a robust 19.5% advancement in total income to RM1.8b with all income segments of net interest income (NII) (+3.5%), net income from Islamic banking (IBI) (+10.6%), and NOII (+62.3%) recording gains. The very strong showing from NOII is partly attributable to RM44.2m in contribution from the asset management business under AFFIN Hwang Capital (comprising AFFIN Investment Bank Berhad and AFFIN Hwang IB as well as AFFIN Fund Management Berhad and AFFIN Hwang Asset Management Berhad), post-completion of its integration on 20 Sept 2014.

 Whereas, the growth in NII to RM949.2m (+3.5% from RM916.8m) was likely the result of loan book expansion of 9.6%, as net interest margin (NIM) is estimated to have slipped 20bpts.

 Gains were more than offset at the net profit level given: (i) a jump in the cost-to-income (CI) ratio to 53.9% (+6.9ppts) on integration costs in relations to the Hwang IB merger, (ii) an increase in finance cost (+45%), and (iii) a higher effective tax rate of 25.3% (+1.4ppts).

 Meanwhile, excess liquidity was lower as loans-deposit ratio inclined 2.0ppts to 81.1% (industry: 81.2%), on stronger gross loans growth of +9.6% (industry: +8.7%) vis-à-vis deposits’ +6.9% (industry: +7.6%). In terms of the proportion of current and savings account deposits (CASA) to total customer deposits; it fell by 1.5ppts to 20.1%.

 Asset quality was better with gross impaired loans (GIL) ratio dropping 16bpts to 1.82%, meeting management’s target of 1.84%. Coverage also saw improvement with the loan loss coverage (LLC) ratio having inclined 1.2ppts to 75.6% (although it still remained <100%). Meanwhile, the write-back ratio was higher at 26bpts (+8bpts).

 QoQ, 4Q14 net profit grew by an outstanding 46.9% to RM208.6m due in part to sequential growths recorded in NII (+1.4%), and IBI (+11.6%). A drop in NOII (- 19.3%), however, put a drag on total income which dropped 5.6% to RM477.0m.

 Nevertheless, a larger fall in the CI ratio (-8ppts) to 51.1% lifted 4Q14 net profit into the positive territory.

Outlook  The reported results fell short of two of the four internal targets set by the Group. FY14 return of equity and return on asset came in at 8.4% and 1.0% respectively, underperforming the Group’s aspirations of 9.2% and 1.1%. Whereas, FY14 GIL ratio (1.82% vs. target 1.84%) was inline. We also view FY14 earnings per share of 35.25 sen as having met the targeted 36 sen for FY14 as it came in at 97.9% of said target.

 Moving forward, AFFIN has set lower FY15 key performance indicators as follows:- o After Tax Return on Equity (ROE) : 8.0% o After Tax Return on Assets (ROA) : 0.9% o Gross Impaired Loan Ratio : 1.64% o Earnings Per Share (EPS) : 33.00 sen

 The lower targets were likely arrived at after taking into account the Group’s larger share base post-completion of the right issue mid-2014 which saw the listing and quotation of 448.4m new AFFIN shares.

 Nevertheless, we are expecting FY15 bottom-line to register a growth (vs. a decline this FY14).  In particular, we are expecting NII and IBI to be FY15’s revenue drivers, while NOII may take a breather after its outstanding growth this year.

 Nevertheless, NIM should resume its downwards trajectory on the ongoing harsh competition for deposits and more restrictive lending environment.

Change to Forecasts  Taking the smaller-than-expected net profit decline this FY14, we have adjusted upwards out FY15 forecast by 8%, while FY16E numbers are introduced.

 Essentially, we have added 47bpts to our FY15E earnings yield assumption given that AFFIN has proven resilient in this area, while relaxing our CI ratio assumption by -1ppts as the intensity of the merger integration costs start to come off.

Rating  Maintain MARKET PERFORM

Valuation  Target price (TP) increased to RM3.07 (from RM2.79), by applying a FY15 price-book (PB) / price-earnings (PE) ratio of 0.8 / 8.8x.

 The unchanged PB ratio applied is based on the group’s historical share price performance which traded in the range of 0.8-0.9x PB ratio when ROE was hovering around 6.5-9.5%, whereas the PE ratio applied represents the Group’s average 3-year historical PE ratio.

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 impaired loans, hence higher credit charges. 

Source: Kenanga