INVESTMENT HIGHLIGHTS

• Within expectations

• Net profit growth due to NOII and Islamic Banking income

• Higher CI ratio possibly from continued investment resulting from transformation program

• Loans accelerated slightly with solid growth in SME and mortgage segments

• CASA expanded +4.9%yoy while asset quality stable

• No change to forecast

• Maintain BUY with unchanged TP of RM3.30. We rollover our valuation to FY18

Within expectations. The Group posted net profit of RM120.2m, which was a growth of +4.0%yoy, for 1QFY17. This was within ours and consensus' expectations at 22.9% and 21.4% of respective full year estimates.

Strong PPOP growth despite high OPEX. The net profit growth was due to higher PPOP which grew +17.3%yoy. This was from strong income growth which outweighs OPEX growth. Income expanded +19.4%yoy due to NOII and Islamic Banking Income, which grew +39.6%yoy and +30.6%yoy respectively. Better NOII was due to higher fee income (+31.6%yoy to RM142.1m) and trading income (RM34.3m vs. RM7.2m in 1QFY16), while strong growth on income from investment account fund (+48.0%yoy to RM28.4m) contributed the Islamic Banking income growth. We believe that this is in line with the Group’s strategy of income based growth such as fee income.

Uptick in CI ratio. CI ratio went up +0.6ppt yoy to 64.5%. We believe that this was on the high side but we understand that the Group may still investing for its transformation. Personnel costs grew +19.8%yoy to RM176.3m, while commission & brokerage fees and professional fees went up >100% to RM38.8m and RM10.9m respectively.

Gross loans grew slightly faster. Gross loans growth accelerated slightly at +1.9%yoy to RM45.0b, vs. +0.6%yoy posted in 4QFY16. Main contributor to the gross loans growth was mortgages and SME loans. These segments grew +44.4%yoy to RM12.3b and +12.3%yoy to RM7.4b respectively. This did not come as a surprise as the Group focused on segments with better yields.

CASA ratio improved. Deposits increased only by +0.1%yoy to RM50.1b. However, we were pleased to see CASA expanded by +4.9%yoy to RM9.3b. We believe that this contributed to the better margins this quarter.

Asset quality stable. GIL ratio was stable at 1.99% vs. 1.98% as at 1QFY16. Impaired loans grew +2.4% to RM896.7m. This was mainly from mortgages where impaired loans went up to RM391.3m from RM202.9m as at 1QFY16.

Opportunities remains in FY17. As previously stated, management estimates loans growth of lower-to-mid single digit for FY17. However, we have seen loans growth trending higher for the sector. We believe that despite the Group’s selective and cautious approach towards asset growth, loans growth will accelerate. Additionally, 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

We make no change to our forecasts given the result was within expectations.

VALUATION AND RECOMMENDATION

We believe that it was a good performance by the Group. We believe the result highlighted that the Groups' transformation program has been effective. We continue to be encouraged by the Group’s future prospect. 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. As such, we maintain our BUY call for the stock. We rollover our valuation to FY18, with an unchanged TP of RM3.30 based on PBV multiple of 0.7x.

Source: MIDF Research - 29 May 2017