AFFIN registered a lower net profit in FY14 due to higher costs (and tax) and a thinner net interest margin. The decline, however, was mitigated by a strong growth in contribution from the noninterest income (NOII) segment. Moving forward, management has chosen business sustainability as its key focus. In particular, it aspires also to grow its non-interest income. However, we have yet to see if the segment will be able to propel significant growth to carry the weight of a softer NII, especially given the weaker capital markets. Hence, we keep MARKET PERFORM on AFFIN for now.

Yesterday, AFFIN organised an analysts’ briefing in relation to its FY14 results. Here are the key takeaways:-

Results recap. To recap, FY14 net profit (NP) fell by a smaller-thanexpected 6.9% YoY on a strong showing from the non-interest income segment (NOII) (+62.3%) helped by RM44.2m in contribution from the asset management arm of Affin Hwang Capital post completion of its integration on 20 Sept 2014. The decline in FY14 NP was primarily the result of: (i) a jump in the cost-income ratio to 53.9% (+6.9ppts) on integration costs relating to the Hwang IB merger, (ii) an increase in finance cost (+45%), and (iii) a higher effective tax rate of 25.3% (+1.4ppts).

Net interest income took a back seat as margin thinned. Net interest income (NII), on the other hand, took a back seat this FY14, managing only a small 3.5% gain to RM949.2m. Management revealed that the sluggish growth was caused by a slip in net interest margin (NIM) to 2.02% (-8bps) owing to stiff competition in terms of loan and deposit pricing. Further NIM compression appears to be anticipated.

Business sustainability as key focus. Moving forward and in view of the increasingly challenging operating environment, the Group has chosen business sustainability as its strategic focus. Identified initiatives include: (i) controlled loans growth, (ii) maintaining and preserving asset quality, (iii) competitive funding strategy, (iv) increase contribution of fee income, and (v) capital conservation.

Non-interest income to the fore? The initiatives suggest that there could be some redirection of focus away from the Group’s core interest income segment towards growing its NOII, especially with the completion of the merger of the investment banking and asset management operations of HwangDBS in September last year. Now branded as Affin Hwang Capital, the management aspires for each of the segments under its IB and AM businesses to be ranked top 5 by 2019. As at FY14, we estimate the IB and AM business contributions to be c. 20% of total income.

Maintain MARKET PERFORM. While growing the NOII business could cushion against slower NII growth, we have yet to see if the segment will be able to propel significant growth to carry the weight of a softer NII, especially given the weaker capital markets. Hence, we keep our earnings estimates for now and maintain MARKET PERFORM on AFFIN. Our FY15/16 forecast imputes a more conservation 30-31% NOII contribution to total income vs. FY14’s 35% while representing a 5% step up from FY11-13 average of 25%. Target price (TP) unchanged at RM3.07, based on a FY15E price-book (PB)/PER of 0.8/8.8x. The 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.

Source: Kenanga