• Transformation at Affin Bank level have bear fruit

• Refocusing its approach to income based growth rather than asset based approach

• Cost optimization to be expected

• Looking to grow quality assets and deposits. Emphasising on SME, consumer and corporate segment. Also, diversifying deposit base

• “Affinity” transformation program will drive the change and catalyst for growth

• Targeting for higher loans growth in FY17

• We believe that the Group is building its niche and this will ensure profitability. Maintain our BUY call, 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

Possible upside surprise - key takeaways from briefing. We met with the management yesterday for a briefing session following its 4QFY16 result. The key takeaways were as follows:

• The transformation program implemented at Affin Bank level had started to bear fruit. This was evident with the strong net profit growth.

• Refocusing from an asset growth approach to an income growth approach. This is to be done through focusing on asset quality, right product mix and rebalance of assets and liabilities.

• The Group is reforming its Group structure to be more streamlined.

• The Group has set out an ambitious target.

Strong net profit growth was due to transformation program. As a recap, the Group’s FY16 net profit beat ours and consensus’ expectations where it posted FY16 net profit growth of +52.7%yoy largely due to higher income and lower provisions. Management noted that recoveries have normalised and the Group are not relying on recoveries as the earnings driver. The FY16 income growth of +7.4%yoy to RM1.94bm from higher NOII and

Islamic Banking (+12.5%yoy and +14.2%yoy respectively) income was in line with the Group’s strategy of income based growth. This approach also had led to NIM improvement of +6bps yoy to 1.98%, because the Group was actively seeking to find better pricing for its product and funding. For example, it exited from RM1.6b worth of loans (chiefly from revolving credit product) as it was unprofitable. However, this was replenished by profitable segment.

Refocusing its approach to growing income. With the new growing income based approach, the Group will be concentrating on growing quality assets, and realigning its assets and liabilities. Indeed, this was evident by the marginal gross loans growth of +0.6%yoy as at 4QFY16. Going forward, the Group will be targeting the more profitable consumer, SME and corporate segments. We understand that in the consumer segment, it will be targeting mortgages for affordable homes. We like the fact that the Group will be concentrating on loans for affordable homes as we believe that the demand for this segment is high and hence the potential.

Looking to grow quality deposits. Amongst the other initiatives that we believe will bring sustainable profitability is the rebalancing of its deposit mix. We believe that CASA expansion will be key to income growth where CASA ratio needs to grow from the 18.7% posted as at 4QFY16. In addition, we understand that the Group will also look at diversifying the deposit composition such as increasing the consumer segment contribution from currently 26.5%.

Cost optimization is to be expected. Recall, FY16 OPEX grew +5.3%yoy to RM1.14b as most of its expenses increased. While the OPEX increase was necessary due to the investment needed to carry out the Group’s transformation, we believe that it is at an elevated level. However, management indicated that there may be cost optimization exercise in the near future. We believe that this is necessary to contain the OPEX growth. Other initiatives to rein in cost includes investment in IT infrastructure that will ensure lower establishment cost from smaller branch footprint (with minimal stuffing, digital storage facilities, etc.) even as it may increase the number of branches.

Streamlining structure. The management gave some granularity in terms of the proposed reorganization of the Group. As announced, the Group will undertake an exercise to transfer its other subsidiaries in the investment banking, insurance and money brokers to Affin Bank. Subsequently, Affin Holdings Bhd will distribute its Affin Bank shares to its shareholders and Affin Bank will assume the listing status of Affin Holdings Bhd. We opine that this is a good move as it will streamline the structure which accounts for the main business focus of the group. We believe that there may also be improvement in costs and corporate efficiency by eliminating the need for two separate boards of directors and committees. Nevertheless, we believe that there will be no material impact to its earnings and its balance sheet, with drivers maintained the same.

Ambitious targets. We gather from the briefing that management are upbeat on attaining stronger performance in FY17. This is evident by the loans growth target of +8%yoy, which is above our loans growth an expectation for the sector. However, we are not discounting the Group’s ability to achieve this target given the positive surprises of the last few quarters.

FORECAST

We make no changes to our forecast.

VALUATION AND RECOMMENDATION

Maintain BUY. We believe that the Group is moving in the right direction. The transformation program has already made an impact as evident by its performance in FY16. Meanwhile, OPEX may come in higher in FY17 but this will only be temporary. We believe there may be potential for more upside surprises. 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 - 2 Mar 2017