What’s New

• Results exceeded expectations on lower-thanexpected provisions and higher NIM, but sustainability of low credit cost is a key risk

• Impaired loans ratio declined to 1.7%, mainly due to large write-offs

• Raised earnings on higher NIM and lower expense growth

• Upgrade to HOLD, with higher TP of RM2.60

Keeping watch on deliveries from Affinity, upgrade to HOLD. FY16 earnings were largely driven by lower credit cost, which lifted ROE to above 6% (from sub-5% in FY15). While we have imputed low credit cost for the forecast years, we continue to see risk on the sustainability of this as Affin Holdings Berhad (Affin)’s earnings buffer wears thin (lowest loan loss coverage in the industry at 55%). However, ceteris paribus, re-rating catalysts could emerge when strategic initiatives under its Affinity transformation plan start to deliver results this year.

4Q/FY16 earnings beat expectations as provisions stayed low and NIM improved. Full year earnings growth was led by the substantial reduction in provisions (from credit cost of 38bps in FY15 to 10bps in FY16). Absolute impaired loans declined substantially in 4QFY16 due to large write-offs in impaired loans. This brought gross impaired loans ratio lower to 1.67%. Higher net interest margin (NIM) lifted net interest income and Islamic banking income, although this was slightly offset by soft loan growth (+2.4% q-o-q/ +0.6% y-o-y). Non-interest income was lifted by higher gains on derivatives and investment securities.

Raised earnings by 15%/18% in FY17-18F on higher NIM and lower expense growth assumption. We raise our NIM assumption to account for the better-than-expected improvement in cost of funds and kept credit cost low, at less than 15bps across the forecast years. Among the targets set under Affinity, we expect cost containment to be a low hanging fruit that the group can reap in the short-term. Hence, we imputed lower expense growth. All in, ROE is now expected to gradually improve to above 7% in FY19F. Our TP is raised accordingly to RM2.60 (from RM2.00 previously).

Valuation:

Our RM2.60 TP implies 0.6x FY17F BV and is derived from the Gordon Growth Model. This assumes 7% ROE, 10% cost of equity and 3% long-term growth.

Key Risks to Our View:

Inability to deliver on strategic goals. While it is still early days, we believe there will be risks to the share price performance if Affin fails to deliver on its strategic initiatives.

Source: Alliance Research - 1 Mar 2017