After attending its conference call yesterday, our TP is raised to RM2.90 (from RM2.85). While management is optimistic on loans targets, we, however, remain cautiously optimistic on better Net Interest Margin (NIM) ahead.

Management's strategic focus. At yesterday’s post-results conference call, management highlighted its strategic focus to enhance bottom-line profitability at the expense of top-line growth. This will involve selective asset growth on better priced loans, which will translate to better NIM.

Loans slower but maintained targets. While loans growth was faster YoY (at +1.9%) than the preceding quarter, management is quite satisfied with the progress and maintaining its target growth of 8% for FY17, with the driver coming from retail and SME segments with most loans expected to come on stream in 2H17. Part of its optimism comes from loans pipeline that was booked in 4Q16/1Q17 and expected to be disbursed in 2H17. The new loans will see better pricing, which is part of its strategic focus to enhance bottom-line earnings. While we are encouraged with its bottom-line focus, we are still cautious on its loan targets as competition for loans will be intense with management unlikely to grow loans at the expense of pricing. Furthermore, consumers’ cautionary stance in light of rising costs might slow retail spending. We maintain our loans growth expectations of ~5%.

NIM boosted by exit of low yielding assets. As highlighted before, NIM improved by 8bps, which management alluded to better pricing as the focus is on better yielding assets. The higher NIM was boosted with the exit of nearly RM1.5b loans in the form of revolving credit, as these loans' interest margins were below the bank's hurdle rate and hence easier to exit. With the focus on better pricing assets, we are confident of AFFIN maintaining its improved NIM with potential higher cost of funds curtailed with the recent issue of the RM1b MTN programme (Feb 2017) to support funding and translating into stable cost of funds.

FY 17 guidance. With the expected improving economy, management maintained its targets for FY17; (i) loans growth of 8%, (ii) credit charge ratio of ~20bps, and (iii) NIM 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 somewhat cautious on its loans growth expectations and expect earnings growth to come from its fee business and gains from financial instruments (due to stronger equity market).

Forecast earnings tweaked slightly. Slight change in our assumptions for FY17E such as: (i) credit charge at 0.20% (unchanged), (ii) loans growth at 5% (unchanged), (iii) deposits growth of <5% (unchanged), and (iv) NIM to improve by 4bps (from 2bps previously). Our FY18 estimates are also tweaked slightly: (i) credit costs at 0.28%, (ii) loans/deposits at 6%/<5%, and (iii) stable NIM (from a 2bps compression). Our forecast earnings for FY17E/FY18E are slightly higher by +0.8%/+1.4% to RM572m/RM524m, respectively.

Our TP raised to RM2.90. This is based on a blended FY18E PB/PE ratio of 0.60x/10.8x. 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 <10%, we maintain our MARKET PERFORM rating.

Source: Kenanga Research - 31 May 2017