AFFIN’s 9MFY17 net profit of RM341.8m is below expectations accounting for 62%/68% of our/market fullyear estimates attributed to higher-than-expected VSS costs. Our TP is reduced to RM2.75 (lower P/B valuation) to reflect concerns on downside for ROE. Maintain OUTPERFORM due to undemanding valuations.

In line, stripping the VSS costs. 9MFY17 CNP of RM341.8m was below expectations accounting for 62%/68% of our/consensus estimates. The negative deviation was due to higher opex (+27% vs. our expectation of 13%) with Cost-to- to Income ratio (CIR) rising by 6ppts to 66% (vs. expectation of <58%) mostly attributed to higherthan-expected VSS cost of RM102m (vs RM50m guided) which occurred in the 3Q. Stripping off the additional VSS cost, 3Q17 CNP accounts for 71% of our full-year estimates. No dividend declared at present.

YoY, 9MFY17 fell 13% dragged by higher opex and allowances for impairments (+212%). Top-line was strong surging by +17% led by strong Islamic Banking income (+22%) and fee-based income (+27%) offset by soft fund-based income (+2%). Soft fund-based income was dragged by flattish NIM (vs. our expectations of +4bps)) as loans improved by +5% (in line with industry 5.2%). Fall in cheap funding costs exacerbated the flat NIM as CASA ratio by 120bps to 17.0%. Asset quality deteriorated with GIL, which inched up by 8bps to 2.2% and 20bps rise in credit costs to 0.21%. QoQ, CNP fell 51% due to: (i) fall in top-line (-8%), (ii) higher opex of +14% (due to the VSS) and higher tax rate by 4ppts to 26%. Top-line was dragged by falling feebased income (-15%) and fund-based income (-5%) but offset by strong Islamic banking income (+14%). Drag in fund-based income was due to: (i) flattish loans and (ii) NIM compression of 6bps. On a positive note, credit costs fell by 7bps 0.32%,32% although there was a slight uptick in GIL by 6bps.

Challenging ahead. We still view that managements’ target growing loans of ~6% could be challenging for AFFIN given that 41% of its loans are from individuals and consumer sentiment that could slow in FY18 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 flattish growth is a concern and goinrd into 2018, NIM might under renewed pressure due to intensive deposit intake as CASA contribution is low. As AFFIN goes fully into its AFFINITY Transformation Programme in 2018, we see elevated CIR.

Earnings tweaked downwards. We tweaked our FY17E earnings by 7% to RM507m on account of additional VSS costs. No change to our FY18 earnings as we maintain our assumptions.

TP reduced, but call maintained. Our TP is reduced to RM2.75 based on a blended FY18E PB/PE ratio of 0.52x/10.8x (0.6x/10.8x previously). The lower PB (-1SD below mean) is to reflect lower ROE ahead (impacted by MFRS9 and potential downside pressure on NIM) 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 0.52x P/B, its undemanding valuation gives a potential total return of >18%; thus, we maintain our OUTPERFORM rating.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, as well as (iii) worsethan-expected deterioration in asset quality.

Source: Kenanga Research - 4 Dec 2017