INVESTMENT HIGHLIGHTS

• We participate in a briefing from management.

• Key takeaways include; (1) asset quality remains solidly intact, (2) OPEX increase was only temporary, (3) proactive measures led to NIM improvements.

• Loans growth target ambitious but we are not discounting the Group’s ability to meet the target.

• We continue to be encouraged by the Group’s prospects.

• No change to forecast.

• Maintain BUY with unchanged TP of RM3.30 as we peg FY18 BVPS to 0.7x PB multiple.

Key takeaways. We participated in a briefing held by the management yesterday which reinforced our optimism for the Group. In our opinion the key takeaways are:

• Asset quality remains solidly intact even though there was an uptick in GIL ratio.
• OPEX will start to normalize in 2HFY17.
• NIM improvement was due to active management of its loans and deposits book.

Asset quality remains solidly intact. Recall, GIL ratio as at 1QFY17 was stable at 1.99% vs. 1.98% as at 1QFY16. However, there was an uptick from the 1.67% posted as at 4QFY16. Management clarified that this was due to one specific account which was restructured and it was from the non-residential sector. Management expects that this account will be reclassified as performing after the 6-month period given the loan is still being serviced. We believe that the management are being very alert and prudent in restructuring a potential distress loan early.

High OPEX for now but will bring cost savings. The high OPEX registered in 1QFY17 was due to investments done for its transformation program. Amongst the cost incurred were additional staff (approx. 200 extra), and IT cost stemming from a change in vendor. However, the additional IT cost will result in savings to be realised in 2HFY17. Amount expected around RM25-28m. As such, management expect CI ratio to fall below the 60% level by end FY17.

Strong NIM improvement despite higher funding cost. NIM for 1QFY17 improved by +13bps yoy to 1.97%. This improvement came in despite higher cost of funds, which went up +40bps yoy to 3.33% due to competitive pressure. From this, we can estimate that loan yield went up by approx. +53bps yoy to 5.30%. In our opinion this was a notable achievement. Management indicated that this was due to exiting RM1.5b worth of revolving credit facility which had low margins, and actively pursuing better yielding loans. We believe that the Group’s shift of focus from asset building to income growth have bear result as evident by the NIM improvement.

Gross loans growth accelerating slightly. With the income growth approach, the Group will be concentrating on growing quality assets. Going forward, the Group will be targeting the more profitable consumer, SME and corporate segments. Nevertheless, 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. Management expect loans growth to come in around 8-10% by end FY17. We believe that this is an ambitious target, but we are not discounting the Group’s ability to achieve this target given previous positive surprises.

Opportunities remains in FY17. We believe that despite the Group’s selective and cautious approach towards asset growth, loans growth will accelerate based on our observation of the banking system data. 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. We believe that income growth momentum will be maintained given the Group’s proactive management of its assets and liabilities.

FORECAST

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

VALUATION AND RECOMMENDATION

We believe the 1QFY17 result highlighted that the Groups' transformation program has been effective and the Group is moving in the right direction. We continue to be encouraged by the Group’s future prospect and 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 RM3.30 based on PBV multiple of 0.7x.

Source: MIDF Research - 31 May 2017