After attending its analysts’ briefing yesterday, our TP is reduced to RM2.04 (previously RM2.15) for AFFIN. At the briefing, management revised downwards guidance for FY16 but maintained its strategic focus.

Review of Results. To recap, Affin reported a net profit of RM253m for 1H16, exceeding expectations attributed to lower-than-expected credit cost. Management explained that the lower provisions in 1H16 were due to the absence of a one-off provision that management undertook and completed in 2015 which management had indicated earlier this year that it was unlikely to occur in 2016.

Lower loans and deposits due to strategic initiative. The low loans growth of +2.7% YoY was attributed to nearly RM1.6b loans exited by management that were deemed as marginal profitability. They were replaced by nearly RM600m new loans from both corporate and consumer segments. 1H16 also saw portfolio rebalancing which led to falling deposits (-6.5% YoY) as management deemed its and LDR (93%) as acceptable; thus, the lack of incentive to shore up deposits. Falling deposits coupled with better profitability loans led to better NIM (+5bps for 1H16). As for asset quality, although GIL is at 1.98% (from 2.04%), management do not foresee further deterioration with numbers under control. Stripping of its performing loans that has been rescheduled & restructured (R&R) and loans that have been impaired due to credit weaknesses GIL would have stood at 1.72%.

Guidance revised. Management is maintaining its focus of a balanced portfolio of 50:50 ratio of retail/corporate loans. As of 1H16, its portfolio mix is 41% consumer and 59% corporate (30% SMEs and 29% corporate of total portfolio). The focus on retail is expected to generate more ancillary income. With the challenging economy still prevailing, management has revised down its guidance for FY16; (i) loans growth of 5-6% (from 6-8%); (ii) credit charge ratio of 15bps (from 20bps), and (iii) LDR of between 85-90% as management believes liquidity is ample and the focus will be on managing its cost of funds. NIMs are unlikely facing compression pressure due to less upward pressure on COF.

Forecast earnings revised as per guidance. With this new guidance, we have revised our assumptions for FY16-17E such as: (i) credit charge at 0.20% (guidance only 15bps and we only factored in 5bps earlier) (from 0.05% previously) for FY16-17E, (ii) loans growth at 5%/6% for FY16-17E (previously 3%/4%%), (iii) deposits growth of 1.2%/1.6% for FY16-17E (previously -3.5%/2.1%%),(iv) and NIM to improve by 7 bps for FY16E but to compress by 4bps for FY17E (from +5bps/-5bps for FY16-17E) as management will strive to shore up its deposits in FY17. Our FY16-17E earnings are revised slightly downwards by 9-7% to RM383-417m.

TP reduced to RM2.04 with an UNDER PERFORM rating. Postbriefing, we revised down our TP to RM2.04 (from RM2.15) based on a blended FY17E PB/PE ratio of 0.5x /8.7x (unchanged). At 2.04, there is a 4% downside from current price; thus, we downgrade to UNDER PERFORM.

Source: Kenanga Research - 2 Sep 2016