INVESTMENT HIGHLIGHTS

• Beat expectations from lower net impairment losses

• Strong net profit growth due to income growth and lower provisions

• Income growth due to NOII and Islamic Banking income

• CI ratio improved but OPEX still elevated

• Gross loans growth momentum slowed due to portfolio rebalancing but solid in SME and mortgage segments

• Liquidity improved while asset quality stable

• Adjusting our FY17 forecast upwards by +11.7%

• Maintain BUY with an unchanged TP of RM2.85 based on our PBV to 0.6x, which is 1 standard deviation below its average 5-year PBV

Net profit came in above expectation. The Group’s FY16 net profit was above our and consensus’ expectations coming in at 112.0% and 114.3% of respective full year estimates. The variance was due to the Group registering lower net impairment losses and higher than expected result from its associate.

Strong net profit growth due to higher income and lower provisions. The Group posted FY16 net profit growth of +52.7%yoy largely due to higher income and lower provisions. Total net impairment for loans and other assets fell -73.7%yoy to RM43.4m due to higher write backs (>100%) and lower individual allowance.

Robust income growth from NOII and Islamic Banking income. Income for FY16 grew +7.4%yoy to RM1.94bm from higher NOII and Islamic Banking income where it registered a +12.5%yoy and +14.2%yoy growth respectively. We believe that this is in line with the Group’s strategy of income based growth such as fee income.

CI ratio improved slightly. FY16 OPEX grew +5.3%yoy to RM1.14b as most of its expenses increased. For example, 4QFY16 promotional and marketing expense went up by +57.7%yoy to RM46.7m. We believe that OPEX is expected to grow due to the investment necessary to carry out the Group’s transformation. However, CI ratio improved by - 1.2ppt yoy to 59.0%

Gross loans momentum slowed possibly due portfolio rebalancing. Gross loans growth came in at +0.6%yoy to RM44.2b as at 4QFY16. Comparatively as at 3QFY16 and 2QFY16, it expanded +1.8%yoy and +2.7%yoy respectively. However, we believe the slower loans growth momentum could be due portfolio rebalancing whereby the Group focused on segments with better yields. For example, SME loans and mortgages grew strongly by +37.4%yoy to RM12.6b and +10.4%yoy to RM7.1b respectively, while personal loans fell -7.3%yoy to RM691.3m.

Deposits outpaced loans growth, while asset quality stable. Growth in customer deposits grew +1.9%yoy to RM51.5b resulting in improved liquidity. The Group’s net LD ratio came in at 84.9% vs. 86.5% as at 3QFY16 and 85.7% as at 4QFY15. We were especially pleased that the more expensive fixed deposits fell -5.6%yoy to RM30.0b. CASA decline moderated from -8.1%yoy as at 3QFY16 to -0.4%yoy to RM9.65b. This was due to +4.7%yoy growth to RM2.0b in savings account. GIL ratio improved by further by -23bps yoy to 1.67% as total impaired loans fell by - 11.6%yoy to RM737.3m. This was mostly contributed by lower impaired loans in the real estate sector.

Pockets of opportunity in FY17. In our previous meeting, the management indicated that FY17 will continue to be challenging for the Bank and the industry. However, it believes that there will be pockets of opportunity. As such, management estimates loans growth of lower-to-mid single digit. This is slightly lower than our forecast of mid-tohigh single digit growth. Nevertheless, aligns with the Group’s selective and cautious approach towards asset growth. We believe that the Group will be in a good position to take advantage of any upswing in conditions with transformation instituted at Affin Bank and Affin Islamic Bank.

FORECAST

In light of the better than expected results, we adjust our FY17 forecast upwards by +11.7%.

VALUATION AND RECOMMENDATION

Maintain BUY. We continue to be encouraged by the Group’s future prospect. We believe that the transformation program is having an impact, as evident by its performance in FY16. As previously stated, we like the fact that the Group is focusing on mortgage for affordable housing segment given the high demand for this property segment. We believe that the Group is building its niche and this will ensure profitability. Therefore, we maintain our BUY call for the stock, with an unchanged TP of RM2.85 based on our PBV to 0.6x, which is 1 standard deviation below its average 5-year PBV

Source: MIDF Research - 1 Mar 2017