AFFIN was reported to be planning to reduce its workforce by 6%, which will incur an additional RM50m to its opex. While we trim its FY17E earnings by 8%, our FY18E is maintained as we had previously accounted for a lower CIR. Maintain OUTPERFORM.

Reduction in workforce. It was highlighted in the media yesterday that Affin Holdings Bhd (AFFIN) is planning to reduce its workforce by as much as 6% or 300 staff. The media quoting senior AFFIN’s management mentioned that the reduction is “part of its strategy to be an efficient financial entity while improving productivity”. The scheme which is virtually a Voluntary Separation Scheme or VSS will likely be offered towards year end. The VSS is expected to add an additional RM50m to its opex for FY17.

VSS to be completed by 4QFY17. We understand that a VSS has been initiated since last month with the bulk likely to be completed by the end of the year. However, we were not surprised with cost reduction via VSS as AFFIN had highlighted before that it intends to improve productivity via operational efficiency under its AFFINITY TRANSFORMATION PROGRAMME with the target to reduce its Cost to Income ratio (CIR) under 50% by 2020 (FY16: 56.5%).

FY17E tweaked slightly downwards. Our FY17E estimate is shaved by 8% to RM547m as we input in the additional costs incurred for the VSS. Our FY18E earnings is maintained as we had imputed in a lower CIR at 57% (vs FY17E CIR of 59%) previously to account for management’s strategic initiatives to improve operational efficiency going forward.

Better yielding assets. We favour AFFIN due to its improving NIM. While we are conservative on its loans (FY17E: ~5%), we are positive on its selective asset growth on better priced loans, which will translate to better NIM for AFFIN. For 1H17, NIM improved by 4bps, which was due to better pricing as the focus was on better yielding assets. The higher NIMs were supported by high Average Lending Yields of 5.3% (vs industry 4.6%) with the focus on the affluent HP segment and SME. We understand from management that its NIMs are above the regulatory 100%. Improving NIMs were also 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.

Our TP is maintained at RM3.00 based on a blended FY18E PB/PE ratio of 0.60x/10.8x. Currently, valuations are undemanding translating into 0.6x P/B (vs its 1-year historical high of 0.7x P/BV). Maintain OUTPERFORM.

Source: Kenanga Research - 06 Oct 2017