After an analysts’ briefing yesterday, we raised our TP to RM1.80 (previously RM1.68) for AFFIN but maintain our UNDER PERFORM call. At the briefing, management guided for a much lower credit cost for FY16 as it shared its strategic focus for the year.

Review of Results. To recap, Affin reported a net profit of RM369m for FY15, a drop of 38% driven by higher loan loss provisions of RM187m and higher opex at +9.2% due to integration costs and VSS (at the investment bank level). Management explained that the high provisions were due to one-off provisions that management had to undertake (mostly completed in 2015 and unlikely to repeat in 2016). NIM compression was more significant mostly in 4Q15 (for 9M15, NIM was fairly stable) as competitions for deposits were rife in the quarter. As for impairments, despite a rise in GIL which is higher than the industry (1.9% vs. industry’s 1.6%) management believes it is well contained with the GIL ratio in 4Q dropping by 31bps from the previous quarter to 1.9%. Exposure to the O&G sector is less than 2% of the loan portfolio and are performing.

Moving forward. As 2016 is expected to be a challenging year, management expects NIM compression to be unavoidable with competition for deposits to continue. Management targets a more balanced portfolio of 50/50 ratio of consumer/corporate loans from its present balance of 45/55. Focus will be more on bring up its mortgage loans (FY15: 15% of the portfolio) up to the industry ratio of 30%. On its HP financing (28% contribution to loan portfolio), management will still focus on the non-national car segment which makes up 80% of its HP portfolio as these have better yields and is focused mainly on the high-income group.

Management gave their growth guidance for FY16 with: (i) loans growth between 6-8%, (ii) deposits at around 5%, (iii) credit costs at around 20bps, and (iv) flattish CIR (FY15: 58%).

Forecast earnings revised. With this new guidance, we have revised our assumptions for FY16/17E such as: (i) credit charge at 0.25% (from 0.44% previously) for FY16/17E, (ii) loans growth at 6/6.1% for FY16/17E (previously 5.5/5.7%), and (iii) deposits growth of 4/4.1% for FY16/17E (previously 3.0/3.1%). The rest we maintained: (i) NIMs compression by 7bps/stable for FY16/17E, and (ii) CIR maintained 55% for both FY16/17E. Our FY16/17E earnings are revised slightly upwards by 16/24% to RM413/419m.

TP raised to RM1.80 with UNDER PERFORM rating. Post-briefing we revised our target price (TP) upwards to RM1.80 (from RM1.68) based on a blended FY16E price-book (PB)/ price-earnings (PE) ratio of 0.4x /8.8x. At 1.80 there is a 18% downside from current price; thus, UNDER PERFORM call is maintained.

Source: Kenanga Research - 8 Mar 2016