12M16 core earnings of RM564m exceeded both our and consensus expectations, accounting for 129%/120% of our/consensus estimates. No final dividend declared pending BNM approval. We maintained our TP and call for now pending a briefing today. UNDERPERFORM.

Earnings boosted by gains from financial instruments and lower allowances for impairments. 12M16 core net profit (CNP) improved by 52.7% YoY, underpinned by lower loan loss provisions by 73.7% to RM43.4m. Top-line growth was faster than the year before accelerating to +7.4% YoY% driven by improvement in Net Interest Income (NII) at +2.4%, Islamic Banking income (+14.2%) and Non- Interest Income (NOII) at +12.5%. NOII was driven by fee income (+7.8% YoY) and gains from financial instruments of RM48.4m (+79.2% YoY). There was a slight compression in NIMs by 2bps YoY but improved QoQ. As top-line accelerated faster than opex (+5.3% YoY), Cost to Income ratio (CIR) fell by 120bps to 59% (vs. industry average of 48.9%). Profitability was also enhanced by lower operating losses of RM7.8m (from its associate and JV partner) and a lower tax rate of 21.4% (from 25.7% the year before).

Loans below expectations and industry. Loans were almost flattish at +0.6% (vs. our expectations of +3%, management?s guidance of 5- 6% and industry?s +5.3%). Loans were driven by mortgages (+6.2% YoY) but dragged by falling financing for transport vehicles of 1.3% YoY. Deposits rebounded to +1.9% (vs. our forecast of +6% and industry?s +1.5%) which led to falling loan-to-deposit ratio (LDR) by 110bps to 85.7%. CASA growth was slower than deposits (-0.4%) forcing CASA ratio to fall by 50bps to 18.7%. Asset quality improved with gross impaired loans ratio (GIL) falling by 23bps to 1.67% and credit costs falling by 41bps to 0.04%. Loan loss Coverage fell 9ppts to 55.0%.

Capital remains adequate with CET1 and CAR at 12.6% and 16.2% well above the regulatory requirements of 7.0% and 10.5%, respectively.

CNP for the 3rd quarter, was faster at 22.7% QoQ with top-line improving by 4.6% bolstered by lower impairments at 7.4% QoQ and lower tax rate by 4ppts to 18.4%. Q4 saw better performance from loans at +2.4% QoQ but slower than deposits growth (+4.6% QoQ) which pushed LDR by 2ppts to 85.7%. Asset quality improved for the quarter under review as GIL shed 51bps to 1.67% but credit costs surged 10bps to 0.13%.

Not so rosy outlook. Moving ahead into 2017 could be challenging for AFFIN to grow its loan book given that 41% of loans are for individuals and consumer sentiment could be challenging this year. With loans subdued, deposit growth might be subdued with NIMs compression unlikely to be intense. Pending management briefing today on AFFIN?s strategy going forward, we maintained our FY17 earnings.

Target Price and Rating maintained. Our TP are at RM2.20, based on blended FY17E 0.5x P/B and 8.5x FY17E PER. Maintain UNDERPERFORM as we feel that Group?s growth and asset quality will still be challenging in the light of the volatile environment.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) higher-than-expected loans and deposits growth and, (iii) worse-than- expected deterioration in asset quality.

Source: Kenanga Research - 01 Mar 2017