6M18 set of results came below our/consensus expectations on account of higher impairment allowances in 2Q18. TP reduced to RM2.40 with rating downgrade to MARKET PERFORM due to downside bias in its credit costs.

Below Expectations. 6M18 set of results was hugely disappointing, below our/market expectations accounting for 39%/41% of respective estimates. No dividend declared as expected.

Note that a year–on-year (YoY) comparison is less meaningful as the group underwent a reorganization in October 2017.

QoQ a disappointment on account of higher impairment allowances and opex. QoQ, CNP fell 48% dragged primarily by: (i) higher impairment allowances (vs. write-back in Q1), and (ii) higher tax rate of 31% (vs. 22% in Q1). Top-line rebounded from the preceding quarter as loans (+4%) and NIM (+11bps to 1.8%) improved. Improved NIM was seen as asset pricing outpaced cost of funds. For the same period, deposits fell 0.4%. Falling opex (-2%) improved CIR slightly. Asset quality was mixed as GIL fell 7bps to 2.5% but there was a credit cost of 79bps vs. 14bps credit recovery in 1Q18.

Moving forward, we are positive on the traction on its loans at 3% (Q1: <1%) driven by its mortgage loans (primarily Islamic financing) as AFFIN strives for higher Islamic financing contribution (of 40% by FY19. Its asset quality is still a concern as we understand that the higher impairment allowances were due to provisioning of an O&G-related account (which are secured) and expected to be performing by end of the year. Although CIR improved by 4ppt (due to higher opex for its transformation programme), we expect opex to taper off in 2H18 and CIR to fall further (<60%) for the full FY18.

Forecast earnings tweaked. We tweaked our FY18E earnings lower by 11% to RM493m on account of; (i) loans growth at <3% (unchanged), (ii) credit charge at 35bps (vs. 30bps previously), and (iii) higher NIMs by +2bps (flat previously) and CIR at <60% (from~58%).

TP and rating reduced. Our TP is now at RM2.40 (previously RM2.70) based on a blended FY19E PB/PE ratio of 0.5x/6.6x as we roll over our valuation to FY19. This PB is based on its 5-year mean with a 1SD below on account of challenging loans, and downside bias on credit costs. With potential returns <-1% we downgrade our call to MARKET PERFORM.

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

Source: Kenanga Research - 29 Aug 2018