Strong fee-based income. 6M17 core net profit (CNP) improvement of +6.2% YoY to RM268.6m was in line accounting for both our/consensus estimates at 48%/49%. Top-line revenue surged ahead at 21.5% YoY to RM1097.9m driven by strong fee-based income (+49.6% YoY) and Islamic banking income (+21.6% YoY) but offset by slower fund-based income of +3.6% YoY. Fee-based income was boosted by strong fee income and income from financial instruments as market sentiments improved resulting in better management fees, brokerage fees and improved trading services. Although loans were up by +4.6% supported by higher NIMs (+4bps, in line with our expectations), the tepid growth in fund-based income was also due to lower repricing of assets as average lending yield fell 6bps YoY. Cost to income ratio was flat at 62.0% (vs industry’s 49.1%) as opex and top- line saw similar growth (+21.5%) with the higher opex due to personnel costs on salaries adjustments and influx of new staff.

Improving loans and rise in impairments. Loans grew faster than a year ago at +4.6% YoY but lower than management’s guidance (vs our expectation of +5% YoY and industry’s growth of +5.7% YoY). Deposits growth was strong at +9.9% YoY (vs our forecast of +5% and industry’s +3.2%) which led to lower loan-to-deposit ratio (LDR) by 4ppts to a comfortable level of 88.7%. CASA growth was abysmal, marginally at +0.8% YoY forcing CASA ratio to constrict by 160bps to 17.9%. Asset quality deteriorated with Gross Impaired Loans (GIL) up by 9bps to 2.1% (vs industry’s 1.64%) with credit costs up by 19bps (vs our expectations of 18bps) due to legacy loans. We understand that the deterioration was due to higher rescheduled & restructured (R&R) loans.

QoQ improvements supported by strong fee-based income. QoQ saw satisfactory improvements as CNP surged ahead at 23.5% to RM148.4m as top-line rebounded from the previous quarter at 15.4%. Improvement in top-line was supported by strong fee income (+34.5%) and fund-based income (+6.3%). The rebound in fund-based income was due to better NIMs (+6bps) as loans growth was flat at +0.6%. On the back of improving deposits of +2.0%, LDR fell by 110bps to 88.7%. Asset quality continued to deteriorate by another 70bps to 2.1% with credit costs following a similar trend surging by 27bps to 0.32%.

Still challenging ahead. We still view that growing loans book could be challenging for AFFIN given that 41% of its loans are from individuals and consumer sentiment could slow in FY17 considering the rising cost of living. Loans growth could be supported by loans from affordable housing with focus on affluent HP and SMEs that would give better yields. The positive market sentiments might continue in the latter half of 2017, which would support its fee-based growth.

Earnings tweaked upwards slightly. We tweaked our FY17E/FY18E earnings slightly by 4%/5% to RM597m/RM552m on account of better performance from fee-based income. TP and call revised upwards. Our TP is raised to RM3.00 (from RM2.90) 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. At 0.6x P/B, its undemanding valuation gives a potential total return of >20%; thus, we maintain our OUTPERFORM rating.

Source: Kenanga Research - 05 Sep 2017