Following a results’ briefing by management yesterday, we upgrade AFFIN’s TP to RM2.50 with a MARKET PERFORM call. According to management, risks of loans growth are moderating, but concerns on NIM pressure and asset quality still linger. To recap, 6M18 was a disappointment quarter due to 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).

Loans growth will be on target. Management reiterated that its loans growth target of 6-7% is achievable on the back of a strong 1H18 performance and a strong pipeline. The growth will be driven by housing and SME segments while corporate loans are expected to be flattish. Based on its pipeline, management is confident to add RM3.5- 4.0b into its loans book. As of 1H18, AFFIN’s total loans book stood at RM47.8b. So far this year, loans disbursements are averaging RM350m/month, reinforcing its confidence of achieving FY18E target. Consumer loans (50% target contribution from new loans) are mostly mortgages (90% Islamic) in line with its target of Islamic assets contributing 40% of its total assets by 2019. (Currently, Islamic portfolio stands at 37%). As highlighted before we are positive on the rebalancing of its Islamic portfolio as margin compression on its Islamic loans is less than conventional ones with Islamic profit rate staying stable in the last two years (at 1.9%).

Impairments are mostly from two individual accounts. While 1H18, have seen uptick in credit costs (0.33% vs. 1H17: 0.19%), management explained the uptick were mainly due to two accounts, from O&G and Real Estate sectors, which constituted nearly 75% of the impairment allowances for the period. Management are confident of resolving both accounts by 1Q19 (Real Estate by 4Q18, O&G by 1Q19). As such management guided for credit costs of between 30-40bps for FY18 (in line with our expectation of 35bps).

NIM under pressure. Although NIM improved on QoQ basis, we expect downside pressure will persists as AFFIN’s NSFR (Net Stability Funding Ratio) ratio is at ~70%, and management’s focus for 2H18 will be to shore up its deposits to comply with NSFR ratio (100%) by Jan 2019. We still expect flattish NIMs ahead (despite management’s deposits target of 11%) as funding costs will be mitigated by better yielding loans (coming from consumer), and the Jan 18 OPR hike.

FY18E/FY19E earnings tweaked. We tweaked our FY18E earnings downward by 5% to RM471m on account of; (i) loans growth at ~7% (previously ~3%), (ii) credit charge at 35bps (unchanged), and (iii) flat NIMs (from +2bps), CIR at <60% (unchanged). For FY19E, these are the assumptions; (i) loans growth at <6%% (previously <5%), (ii) credit charge at 26bps (unchanged), and (iii) widening NIMs (+2bpsunchanged), CIR at <60% (from 58%). We also revised down NOII earnings by 14% thereby reducing our FY19E earnings by 11%.

TP raised but rating maintained. Our TP is raised to RM2.50 (previously RM2.40) based on a blended FY19E PB/PE ratio of 0.49x/7.8x (previously 0.46x/6.56x previously). The PB ratio is on its 5- year mean with closer to a 1SD below with a higher PE ratio given the expected improvement in loans. However, concerns on NIM pressure, asset quality, NOII growth still linger. MARKET PERFORM maintained.

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

Source: Kenanga Research - 4 Sept 2018