Post-briefing yesterday we keep AFFIN’s forward earnings estimates intact and maintain our TP and call. Elevated opex are expected due to its digitization programme going into full gear in 2018.

AFFIN yesterday held a post results conference call on its latest 9MFY17 numbers. To recap, AFFINS’ results were below expectations, dragged down by higher opex due to the additional expenses and VSS exercise conducted in the 3Q. Altogether, this led to higher opex by +27% YoY, pushing CIR up to 65% for 9MFY17. Promotional and marketing related expenses jumped 82% to RM200m (mainly higher commission incurred as its Asset Under Management (AUM) expanded. We understand that management will be reclassifying these expenses, resulting in lower expenses moving forward.

Elevated costs for FY18. While reiterating the VSS will be a one-off exercise, management guided for further upside pressure on opex due to the current transformation exercise (AFFINITY TRANSFORMATION PROGRAMME) with the target to reduce its Cost to Income ratio (CIR) under 50% by 2020 (FY16: 56.5%). The Group’s digital transformation programme (under the Transformation exercise) is expected to be in full swing in 2018 and additional personnel (~50-100pax) will be added by year end. We expect elevated CIR for FY18 due to the digitization exercise.

Revised loans growth target. Management also guided for a lower loans growth of 4-5% (from 5-6%) underpinned by new loans/drawdown mostly from corporates. The revised guidance is due to the expected drawdown/new loans (mostly from corporate sector) being shelved to 4Q17/2018. GIL (9M17: 2.2% is expected to be under ~1.8% due to recoveries by 4Q17 (Note that 33% of its 9M17 impaired loans are under R&R classification). On a positive note, management guided for loan loss coverage of ~100% going into 2018, which is within our expected range of provisioning for AFFIN into the MSFR9 era.

No change in earnings. We are satisfied with our conservative FY17E/FY18E estimates of RM507m/RM552m at present. Our assumptions are; (i) credit charge at 0.20%/0.28%; (ii) loans grow at 5%/6%, and (iii) NIM improving by 4bps for FY17 but stable in FY18 and CIR at 56%/57%.

TP and call maintained. Our TP is maintained at 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 & transformation exercise 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 >10%; thus, we maintain our OUTPERFORM rating.

Source: Kenanga Research - 5 Dec 2017