9M18 set of results came in line with our/consensus expectations on account of lower impairment allowances. TP of RM2.50 and OUTPERFORM call maintained pending a briefing from management tomorrow.

In line. 9M18 CNP of RM359m is in line, accounting for 76%/78% of our/market estimates. A DPS of 5.0 sen was declared (below our expectations of 7.5 sen).

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

Earnings improved due to write-backs. QoQ, CNP of RM144.6m improved by 97% primarily due to the absence of: (i) large impairment allowances (as impairment allowances fell 95% to RM4.7m), and (ii) lower tax rate of 20% (vs. 31% in Q2). Top-line was marginally flat, as NOII moderated to +4.8% as Islamic banking income fell 7.2% with NII marginal flattish (+0.5%). Loans/Financing continued its traction adding another 90bps to 3.0% driven by residential property purchase (+4.8%) and Working Capital (+3.3%). Improved NIM was seen (by 30bps) as asset pricing outpaced cost of funds. While opex was benign (+0.2%), CIR was relatively flat at 62%. Asset quality was mixed with uptick in GIL by 30bps to 2.8% with a credit recovery of 1bps seen in the quarter.

Moving forward, we are positive on the traction on its loans growth of +3% QoQ driven by its mortgage loans (primarily we believe to be from Islamic financing) as AFFIN strives for higher Islamic financing contribution (of 40% by FY19). Nonetheless, the uptick in GIL is a surprise, but we believe the bulk comes from two individual accounts related to real estate and O&G industries (which management guided before for resolving both accounts by 1Q19).

Forecast earnings unchanged. Our FY18E/FY19E earnings are unchanged at RM471m/RM564m pending a management briefing tomorrow.

TP and rating maintained. For now, we maintain our OUTPERFORM call (due to undemanding valuations) and TP of RM2.50 based on a blended FY19E PB/PE ratio of 0.5x/8.0x (unchanged) pending further updates from management. The PB ratio is on its 5-year mean with closer to a 1SD below, to reflect concerns on asset quality and domestic/external headwinds.

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 Nov 2018