After attending its analysts’ briefing yesterday, our TP is raised to RM2.55 (previously RM2.20). While management is optimistic moving forward on current strategic focus, we, however remain conservative.

Recap Results. To recap, Affin reported a net profit of RM564.0m (53% YoY) for 12M16, exceeding expectations, attributed to lower credit cost and better Non-Interest Income. The lower credit cost in 12M16 was due to the absence of a one-off provision that management undertook and completed in 2015 with better writeback of RM60.3m (FY15: RM7.3m)

Lower loans due to strategic initiative. The marginal loans growth of +0.6% 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. The exited loans are mostly in the form of Revolving Credit, which margins are below management’s hurdle rate and easier to exit. The replacement assets are deemed better in margins and quality. If the exited loans were included, loans growth would be at ~5% YoY. There is also a shift in focus of loans where previously the targeted balance will be 50:50 consumer:corporate loans. Now management’s target will an equal balance between consumer, corporate and SMEs. For FY16, the ratio was 41% consumer, 30% corporate and 29% SME’s (FY15: 40%/30%/30%).

Minimising NIMs compression. To combat the potential cost of funding and support growth, management will be diversifying its funding base with the recent issue of the RM1b MTN programme to support funding and a stable cost of funds.

No issues on Asset Quality. As for asset quality, with GIL at 1.98% (from 2.04%), management do not foresee further deterioration with numbers under control. Loan loss coverage (LLC) is 55% as most of loans are well collateralised but if the regulatory reserve were to be included, LLC would be at 94% with efforts to be made to bring it above 100%.

FY 17 guidance. With the expected improving economy, management gave a set of guidance for FY17; (i) loans growth of 8%, (ii) credit charge ratio of 15/20bps, and (iii) NIMs likely to expand with the focus on better yielding assets and less intensive deposit taking. With the current challenging economy with weak consumer confidence and competition for SME and mortgage loans, we are quite cautious on its loans expectations and expect earnings growth to come from its fee business and gains from financial instruments.

Forecast earnings revised as per guidance. With this new guidance, we have revised our assumptions for FY17E such as: (i) credit charge at 0.20% (unchanged), (ii) loans growth at 5% (previously 3%), (iii) deposits growth of <5% (previously 2.0%), and (iv) NIM to improve by 2bps (compressed by 4bps previously). We also introduce our FY18 estimates, lower due to: (i) credit costs at 0.35%, (ii) loans/deposits at 6%/<5%, and (iv) NIMs compressed by 2bps. Our FY17 earnings are revised upwards by 21% to RM566m. We also introduced our FY18 earnings, expected to be impacted by higher credit costs.

TP raised to RM2.55 but rating maintained. Post-briefing, we raised our TP to RM2.55 (from RM2.20) based on a blended FY17E PB/PE ratio of 0.5x /8.5x (unchanged). As we believe loans growth target remains challenging and the upside from current price is marginal, we maintain our UNDERPERFORM recommendation.

Source: Kenanga Research - 02 Mar 2017