AFFIN?s 1QFY17 performance was within expectations improving by 4% YoY due to surging fee based income. No dividend declared for the quarter as expected. We maintained our TP but call revised upwards to MARKET PERFORM as potential returns looks decent.

Earnings boosted by surging fee based income. 3M17 core net profit (CNP) improved by +4.0% YoY in line and accounting for both ours/consensus estimates at 21%. Topline revenue drove 1Q earnings, surging by 19.4% YoY. As expected topline was driven by strong fee based income (+39.6%) followed by Islamic Banking income (+30.6%) and fund based income (+4.3% YoY). Fee based income was driven by fee income (+73.6% YoY) and gains from financial instruments (+17.8% YoY). The faster fund based income (1Q15: +2.7% YoY) was driven by higher NIM (up by 8bps vs our expectations of higher by 2bps) at 1.9% as loans were tepid at +1.9% YoY. As opex (+20.5% YoY) accelerated faster than topline, Cost to Income ratio (CIR) rose slightly by 60bps to 64.5% (vs. industry average of 46.3% and our estimate of 55%).

Loans growth slower? Loans growth (+1.9% YoY) was slower than a year ago (3M16: +8.9% YoY) vs our expectations of +5% YoY and industry?s +6.0% YoY (vs. management?s guidance of +8% YoY). Deposits growth was flat (vs. our forecast of <+6% and industry?s +3.2%) which led to a higher loan-to-deposit ratio (LDR) by 5ppts to 89.9%. CASA growth (+4.9%) was faster than deposits forcing CASA ratio to improve by 80bps to 18.5%. Asset quality was contained with Gross Impaired Loans (GIL) up by 1bps to 1.99% (vs industry?s 1.63%) and credit charge of only 5bps (vs management?s guidance of 15-20bps and ours of 20bps).

QoQ down across the board. CNP was down by 29.9% as topline revenue fell by 3.5%. Fall in topline was across the board with fund based income, Islamic Banking and fee based income declining 3.0%, 3.2% and 4.2% respectively. Fee income has been trending south since 2Q16. The fall in fund based income was due to NIM compression of 9bps to 1.9% with loans growth slower at 2.0% (vs 4Q16: +2.4%). On the back of declining deposits (-2.8%), LDR rose by 4ppts to 89.9%. Asset quality was mixed as GIL deteriorated by 32bps to 1.99% but credit costs fell 8bps to 0.05%.

Still challenging ahead. We still view that growing its loans book could be challenging for AFFIN given that 41% of loans are from individuals and consumer sentiment could slow in FY17 considering rising cost of living. AFFIN?s NIMs might see better yields ahead as loans growth remains subdued, as deposits intake unlikely to see intense competition. As fee based income has been trending south QoQ, we view that it will be challenging to repeat its fee based income performance in FY17.

No change in earnings. As results were in line, our FY17 forecast earnings are maintained at RM567m.

TP maintained, but call revised up. Our TP is maintained at RM2.85. This is based on a blended FY18E PB/PE ratio of 0.60x/10.8x (previously, it was a blended at 0.64x/10.3x FY18E PB). The lower PB is to reflect lower ROE ahead (impacted by MFRS9) with the higher PER (5-year average mean) to reflect potential higher loans due to improving demand for business loans as economic fundamentals strengthen. With a potential total return of >3%, we revised our call upwards to MARKET PERFORM.

Source: Kenanga Research - 29 May 2017