Asset-quality concern remains

In a tight spot, FULLY VALUED. YTD earnings improvement was driven by lower credit cost; despite no signs of improvements in asset quality (absolute impaired loans increased 7% YTD, loan loss coverage at lowest level since 2010). Separately, growth appears to be challenging as YTD loan and deposit growth remains in negative territory at -3% and -2%, respectively. We keep our view that the stock would likely continue to trade below BV given its weaker fundamentals vs peers.

3Q/9M16 earnings beat expectations as provisions stayed low. At the pre-provision level, earnings met expectations. Net interest income came in flat q-o-q despite lower cost of funds, as loan growth was benign at -0.4% q-o-q/1.8% y-o-y. Non- interest income was boosted by higher forex and trading gains. Cost-to-income ratio ran lower due to the higher income growth. Affin continued to enjoy low provisions on its loan portfolio (thanks to write backs), but incurred provisions for its securities portfolio to the tune of RM19m.

Raised earnings on lower credit cost assumption. Asset-quality indicators remain weak as absolute impaired loans increased q- o-q, while loan loss coverage slid to 60%. However, given that Affin appears comfortable with the current level of loan loss coverage, we are lowering our credit cost assumption to 10/13/15bps across FY16-18F (vs 17bps each previously). As a result, earnings were raised by 8-11% and TP was adjusted to RM2.00.

Valuation

Our RM2.00 TP implies 0.4x FY17F BV and is derived from the Gordon Growth Model. This assumes 6% ROE, 10% cost of equity and 3% growth. We expect weak underlying trends to remain a drag on its share price performance.

Key Risks to Our View

A significant turnaround. We have imputed a weak set of earnings estimates and ascribed a low valuation multiple to the bank. Its current state with weak asset quality has been accounted for. A significant turnaround in its financials and improved asset-quality conditions would prove our view wrong.

Source: Alliance Research - 01 Dec 2016