Following last week post-briefing, AFFIN’s TP is maintained at RM2.45. While loans look challenging, as its portfolio rebalances, growth will be supported by better NIM and better credit charge ahead.

To recap, 9MFY19 CNP of RM366m came below our/consensus expectations, accounting for 63%/68% of respective full-year estimates on account of declining fee-based income, compressed NIM (-20bps) with loans shrinking 5% (vs. target of 3-4%).

Portfolio rebalancing. Management alluded to the decline in loan book as a strategic initiative to rebalance its loans portfolio - as big repayments came on stream with poor disbursements given the challenging environment plus low utilization; hence, the easing of these accounts. Moving forward, focus will now be on higher yielding assets - Personal Use and Credit Cards. While previously Corporate/Consumer portfolio was at 60/40, management indicated a rebalancing of SME/Corporate/Consumer of 10/40/50 with SME targeted to attain 15% in 2 to 3 years’ time. Its Islamic financing will be at 40% of total loans. FY19 loans are expected to shrink by 2% due to the above factors with FY20 loans growth targeted at +5% (or RM2.4b). We believe this is doable given the magnitude of growth historically from household and SME loans. With its Transformation Initiatives in place enhancing products and experience, these will add traction to growth in such segments (Household and SMEs). We, however, pencilled in a conservative +4% growth given the challenging environment.

Expect better NIM ahead. The continued compression in NIM is not a surprise given the lag in re-pricing of deposits. Management gave an indication of a +10bps NIM for FY20 given the focus on higher yielding assets. NIM compression is not anticipated given the moderate credit demand expected plus with its low LDR and Loan to Fund Ratio (LTF) at 82% and 75%. The traction in SME and is expected to bolster CASA (which currently is at a mere 15%) offsetting NIM compression. We maintain an 18bps NIM compression for FY19 (as we expect fully priced deposits in 4QFY19) but pencilling a conservative +5bps NIM for FY20.

Normalised credit charge ahead. 9MFY19 asset quality was mixed as GIL surged 60bps to 3.5% with credit charge recorded at 2bps (or RM7m). Excluding the R&R loans, net impaired loans ratio GIL would have been at 2.6%. 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 at least 1QFY20 which will push GIL down to 2.5%. Despite the large impaired loans, we take comfort that gross credit charge have been low in the last 7 quarters at an average 12bps vs. average credit recovery of 8bps. Given this operational efficiency (with no systemic risk seen from asset quality), management revised its credit charge guidance to 15-20bps and we understand this will be the normalised charge going ahead.

FY19E/FY20E earnings tweaked. We revised FY19E/FY20E earnings by -2%/-3% to RM566m/RM651m on account of: (i) NIMs (-18/+5bps (from -8/-3bps), (ii) loans growth at -2%/4% (from~1%/4%), (iii) credit charge at 25/23bps (unchanged), and (iv) CIR at 60%/59% (unchanged) as most of its strategic initiatives will be completed by 2019.

TP unchanged and rating maintained. TP maintained at RM2.45 based on FY20 target PBV of 0.49x (unchanged) - implying a 0.5SD below mean - to account for its abysmal loans. Given that compliance on NSFR is 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 - 2 Dec 2019