Following a post-results’ conference call with management last Friday, we have downgraded AFFIN’s TP to RM2.40 but reiterate our OUTPERFORM call (due to undemanding valuations). We believe asset quality in FY19 will see improvement following resolution of two huge accounts. Loans growth target is achievable, in our view, following its revision to a more conservative target.

Recap. 3M19 CNP of RM138m was within expectations accounting for 25%/26% of our/market estimates. While loans growth (at +4.6%) was within guidance, NII was dragged by falling NIM (-20bps) as funding costs intensified from higher intake of FDs. CIR of 64% was above guidance of <60% and industry average of 48% due to weak top-line as opex expanded due to its on-going strategic initiatives.

Loans target revised. With economic uncertainties prevailing, management revised its FY19E loan growth target from 4-5% to 3-4%. FY19 loans will be impacted by corporates/SME; thus, will be driven primarily by consumer. Recap, management is strategically building its Islamic contribution to 40% of total assets by 2020 and looks likely to succeed as 3M19 portfolio is already are at 39% Islamic assets. AFFIN is expected to roll out retail and corporate transaction banking by Jul 19 (part of its strategic initiatives), which will support its CASA growth and to comply with NSFR 9 (currently at 90%) by end of 2019. Turnaround time is expected to be faster with corporate internet banking. It is expected to grow corporate banking from the LTAT/Boustead Group of companies which is likely to come on-stream by end of 4Q19/1Q20.NIM compressed due to higher FDs. The 20bps NIM compression was a surprise due primarily to its high intake of FDs as it strives to comply with NSFR by end of 2019 (from mid-2019 initially guided). We understand that its deposits growth target remained at +11% YoY. Weak corporates/SME growths undermine CASA in 1Q19: 14% of deposits). To mitigate this impact, management target FY19 CASA at 20% which we find challenging with anaemic SME growth given the prevailing uncertainties.

While YTD, GIL saw uptick by 77bps to 3.31%, management stress that excluding R&R accounts, GIL stood at 2.63%. Resolution of two huge (O&G and Real Estate related) are slow (was guided to resolve b4Q18/1Q19),9) but management insisted that both will be resolve2019, end of 2019 which will push its GIL to 2.5%. Despite the large impaired loans, we take comfort that impairment allowances have been low in the last three quarters, (at 8bps credit recovery/quarter) partly due to recoveries. Given this operational efficiency (with no systemic risk seen from asset quality) we are inclined to believe that credit costs will be in the range of 20-30bps (vs. management’s guidance of gross credit charge of 30-40bps).

FY19E/FY20E earnings tweaked. We revised our earnings by - 2%/+7% to RM550m/RM637m on account of; i) loans growth at~3%/5%% (from 5%/6%), (ii) credit charge at 24/23bps (from 25/24), NIMs (-10bps/-5 from -3bps/-7), and (iv) CIR at 60%/58% (from 60%/60%) as most of its strategic initiatives will be completed by 2019.

TP lowered but rating maintained. Our TP is reduced to RM2.40 (vs. RM2.60 previously) as we roll over valuations to FY20 based on a target PBV of 0.50x (previously 0.57x) - implying a 0.5SD below mean - to account for the uncertainties ahead. While NIM compression is a concern, we are positive on its operational efficiency which will contain credit costs. Undemanding with total returns still at >10%, OUTPERFORM call is maintained.

Source: Kenanga Research - 3 Jun 2019