Following a post-results’ conference call with management last Friday, we revised slightly AFFIN’s TP to RM2.45 with OUTPERFORM call maintained. We believe asset quality in FY19 will see improvement following resolution of two huge accounts with NIM improving from current levels as its NSFR compliance has been attained. Recap. 6M19 CNP of RM293m came within expectations accounting for 55% of our estimate due to credit recoveries and improving fee based income despite dismal loans and higher NIM compression.

NIM compressed due to higher FDs but expected to improve. The 20bps NIM compression was not a surprise due primarily to its high intake of FDs (+28% YoY vs CASA: +19% YoY). We are inclined to be optimistic on NIM margin to be elevated by end FY9 (from current level) as its NSFR has complied with requirement; thus, slashing its deposits growth by 6ppt to 5%. Furthermore, with its LDR ratio at 80% and no prospect of intense credit demand for 2019, management would be should be able to release some of its excess liquidity. We thus pencilled in a overall lower NIM compression for FY19 at 8bps (vs 10bps previously).

Asset quality to improve. Asset quality was mixed as GIL surged 70bps to 3.5% with credit recoveries recorded at 15bps (or RM36m). Excluding the R&R loans, net impaired loans ratio GIL would have been at 2.7%. As highlighted earlier, the high GIL was due to a couple of unresolved accounts (O&G and Real Estate) of which management are confident of resolving by end 2019 which will push GIL lower to 2.5%. Despite the large impaired loans, we take comfort that impairment allowances have been low in the last 6 quarters (with at least RM8m bad debt recovered/quarter) partly due to recoveries. Given this operational efficiency (with no systemic risk seen from asset quality) we are inclined to believe that net credit costs will be in the range of 20- 30bps (vs. management’s guidance of gross credit charge of 30- 40bps).

Loans target revised. We are however concerned on its loans growth as management revised its FY19E loan growth target from 4-5% initially to 3-4% to 1-2%. Moderation in loans have been primarily from corporates and SME (-2% and -7% YTD, to RM4m and RM18.5m respectively) with consumer flattish at RM25.1m. Disbursement in corporate loans have been slow but management expects it to come in stream by end of 4Q19/1Q20 (coming in from the LTAT/Boustead Group of companies. Given that it has achieved its target of 40% Islamic financing to Group financing, it is expected that its priority on Islamic financing first will support its consumer loan segment and thereby supporting lower provisioning ahead.

FY19E/FY20E earnings tweaked. We revised our earnings by +5% each to RM579m/RM670m on account of: (i) higher Islamic banking income (+25%/+4% vs +22%/+3% previously), ii) NIMs (-8/-5bps (from - 10/-5bps), (iii) loans growth at ~1%/4% (from~3%/5%), (iv) credit charge at 25/23bps (unchanged), and (v) CIR at 60%/58% (unchanged) as most of its strategic initiatives will be completed by 2019.

TP revised up but rating maintained. We raised our TP to RM2.45 (from RM2.40 previously) based on an unchanged FY20 target PBV of 0.50x - implying a 0.5SD below mean - to account for its abysmal loans. Given the compliance on NSFR attained, lower funding cost and credit charges will support earnings ahead with opex expected to taper given the completion of its strategic initiatives. Still undemanding with total returns at >20%, OUTPERFORM call is reiterated.

Source: Kenanga Research - 3 Sept 2019