Period

2Q15/1H15

Actual vs. Expectations

2Q14 net profit of RM139.4m (+363.3% QoQ) brought 1H15 net profit to RM169.5m (-33.5% YoY).

This is below expectations, accounting for 30% and 32% of our full-year forecast and street numbers, respectively.

Dividends

As anticipated, no dividend was declared since our last results note. Historically, dividends were declared in the 2H of the year.

Key Results Highlights

1H15 vs. 1H14, YoY

Affin’s 1H15 pre-tax profit and net profit declined by 35% and 34% YoY, respectively, despite total income growing by 6.5% to RM896.0m. This is due to higher operating expenses, which grew by 19% YoY to RM526.8m and higher allowances for impairment losses of RM136.2m.

Net interest income declined by 4.6% YoY to RM437.2m despite loans’ growth of 8.6% YoY, due to further NIM compression by 20bps.

Annualised gross loan growth of 8.6% YoY was, however, higher than our estimate of 7.5% YoY. The higher growth was mainly driven by stronger loan growth from the Domestic business enterprises and government & statutory bodies, which grew by 14.2% YoY and 723.3% YoY respectively. In terms of loan by economic purpose, the Group seems focused on landed property, construction and purchase of transport vehicles, which grew by 8.4%, 3.0% and 5.4% YoY, respectively.

On the customer deposits front, it only grew 5.0% YoY, which is way below our assumptions of 6.2% YoY. The low cost deposits CASA grew slightly slower at 3.1% YoY which depresses NIMs. (NIM declined 20bps vs. our estimate of 5bps contraction).

Loan-to-deposit ratio (LDR) has improved from 81.1% as at end-Dec 14 to 83.8% as at end- June 15. The LDR remains supportive for growth.

Non-interest income, on the other hand, grew at a slower pace of 23.3% YoY (1H14: 39.2% YoY). However, it accounted for 36.9% of total income (1H14: 31.8%) This segmental income growth was contributed by higher fee income and forex gains.

Operating expenses increased at a lower rate of 19.5% YoY (1H15: 27.3%YoY), due to slower pace of growth in personnel costs and general & administrative expenses. However, cost-toincome ratio (CIR) deteriorated from 52.4% in 1H14 to 58.8% in 1H15 on the back of higher opex growth outpacing total income growth (vs. our assumption of a CIR of 48.5%).

This half saw loan loss impairments of RM136.2m (1H14: RM22.9m) .The annualised credit charge ratio for 1H15 was recorded at 67bps. This credit cost is much higher than our expectation of 32bps.

Asset quality for the Group has deteriorated slightly. As of end-June 15, gross impaired loans ratio diminished to 2.07% from 1.91% in end-June 14. Loan loss coverage (LLC) is at 63.8%, lower than a year ago at 75.3% due to higher growth of gross impaired loans at of 17.8% YoY (1H14: -2.6% YoY).

The annualised ROE of 4.2% is way below our estimate of 7.0%. 2Q15 vs. 1Q15, QOQ

QoQ, net profit improved by 363% due mainly to lower impairment of loan allowances at RM12.1m (1Q15: RM124.1m).

Total income declined marginally by 0.4% QoQ dragged by a decline in non-interest income at of 7.7% QoQ. Net interest income, however, improved slightly by 3.3% QoQ in-line with the 4bps improvement in NIM while gross loans grew 2.6% QoQ.

Operating expenses declined by 4.20% QoQ in tandem with the drop in CIR, at 57.7% as opposed to 59.9% in 1Q15.

Outlook

Judging from the weaker set of results, we have turned more cautions. As such, we make some changes in our assumptions in our earnings:-

Total loan growth: Unchanged. We imputed 7.5% growth for the next two financial years.

Customer deposit growth: We factor in a 5% in deposit growth for FY15 and 6.0% for FY16. Previously, we factored in 6.2% and 6.5%, respectively.

NIM: At 1.8% for FY15 and 1.9% for FY16 (1.9% and 2.0%, respectively, previously).

CIR: 55% for both FY15 and FY16. (48.5% for both FY15 and FY16 previously)

Credit charge ratio: 67 bps for FY15 (vs.32bps previously) but maintained for FY16 of 32bps.

Change to Forecasts

All in, we lowered our FY15E and FY16E net profit estimates to RM352.0m (-41.8% YoY) and RM528.1m (+50.0% YoY) from RM569.7m and RM639.2m, respectively, for now.

Rating

Maintain UNDERPERFORM

Valuation

Consequent to our lower earnings expectation, we reduce our target price (TP) to RM2.40 (from RM2.74) by rolling forward our valuation to FY16 price-book (PB) / price-earnings (PE) ratio of 0.5/ 9.0x (vs. previous blended FY 15 PB / PE of 0.7 /8.6xx).

The PB ratio reflects our decreased ROE expectation of 6.4% (from 7.6%) and is based on the group’s historical share price performance which traded in the range of 0.5-0.9x PB ratio when ROE was hovering around 6.5%-8.0%, whereas the PE ratio represents the Group’s average 3-year historical PE ratio.

Risks to Our Call

Improvements in asset quality and lower credit costs.

More relaxed lending rules and higher loans growth.

Easing of competition for deposits and reversal of NIM compression.

Source: Kenanga Research - 18 Aug 2015