• The Group’s 9MFY17 net profit was within expectations

• Net profit flattish but was supported by double digit income growth from Islamic Banking operations

• OPEX was well contained with CI ratio improved by - 1.1ppts to 46.3%

• Gross loans growth was tepid but targeted SME loans had respectable growth. Asset quality remained good

• Deposit grew +4.2%yoy

• No change to our forecast

• No immediate catalyst. Maintain NEUTRAL with an unchanged TP of RM4.05, pegging its FY18 BVPS to PB multiple of 1.2x

Net profit for 9MFY17 within expectations. Net profit for 9MFY17 came in within ours and consensus’ expectations at 71.4% and 73.6% of respective full year estimate.

Flattish net profit growth. The Group posted a net profit that was almost flattish, registering a growth of +0.6%yoy to RM394.7m. This was due to +69.9%yoy higher provisions and impairment to RM68.6m. Higher provisions was a result of higher collective assessment allowance (+43.6%yoy), loans written off (+17.7%yoy) and lower recoveries (-14.2%yoy). Otherwise, result would have been better since PPOP grew +5.0%yoy to RM591.4m. PPOP growth was due to contained OPEX and strong growth in Islamic Banking income.

OPEX was contained. OPEX grew only +0.5%yoy to RM510.7m despite higher IT investment (+13.8%yoy to RM35.4m). As a result, CI ratio improved -1.1ppt yoy to 46.3%. Management expects CI ratio will be maintained below 50% with continued cost control and selected franchise investment.

Islamic Banking income continued to grow strongly. Islamic Banking income for 9MFY17 grew +20.6%yoy to RM220.6m on the back of strong Islamic net financing income which grew +20.2%yoy to RM208.3m. We believe this was the major reason for the NIM improving +8.0bps yoy to 2.25% as NII was flattish, declining - 0.3%yoy to RM634.8m.

Tepid loans growth but SME loans saw robust growth, while asset quality remains steady. Gross loans growth was tepid at +1.6%yoy to RM39.3b. However, loans from SMEs, one of its targeted markets, grew +12.3%yoy to RM9.5b. Our concern is that there is higher risk attached to this segment. Nevertheless, asset quality remains steady as at 3QFY17 with GIL ratio improving +10bps yoy to 1.0%. In addition, LLC were 137.1% vs. 125.4% as at 3QFY16.

Liquidity improved further. LDR improved to 86.6% from 88.8% as at 3QFY16, as a result from higher pace of deposit growth. We were pleased that deposits grew +4.2%yoy to RM45.4b. Drilling further however, most of the growth came from fixed deposits, which grew +13.5%yoy to RM22.6b. CASA was flat at +0.1%yoy to RM15.3b. CASA ratio fell -1.3ppt yoy to 33.7%.

Meeting most of its guidance thus far. We are positive that the Group is meeting most of its guidance thus far, except on loans growth. Recall, the management guided ROE of ≥11%, CI ratio of below 50%, net credit charge-off of 25-30bp and loan growth of a high single digit. The Group will continue to focus on better RAR loans and had deploy new innovative propositions with its loans consolidation service.

FORECAST

We tweaked our FY18 earnings slightly downwards by -2.6% to take into account the loans growth.

VALUATION AND RECOMMENDATION

There were bright spots for the Group such as the strong Islamic Banking growth, NIM improvement and improved liquidity position. However, these were moderated by the flat NII and tepid loans growth. Higher provisioning also affected the Group’s earnings but we do not believe that there will be undue stress to its asset quality. In addition, we would have preferred to see higher growth from CASA rather than from fixed deposit, which we have highlighted in our previous review of the Group’s 2QFY17 result. While we believe earnings will be decent and the Group is putting forward an interesting product with its loan consolidation service, we do not expect any immediate upward catalyst. Hence, we maintain our NEUTRAL stance on AFG with unchanged TP to RM4.05 pegging its FY18 BVPS to an unchanged PB multiple of 1.2x which is 1 standard deviation below its 5-year historical PBV.

Source: MIDF Research - 23 Feb 2017