INVESTMENT HIGHLIGHTS

• FY17 net profit slightly missed our expectations due to higher provisions.

• PPOP within expectations due to strong Islamic Banking income growth. OPEX was also well contained.

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

• Liquidity improved further with better CASA growth.

• The Group is embarking on transformation.

• Dividend of 7.5 sen, 16 sen for the year.

• Revising our FY18 forecast downwards by -10.0%.

• Maintain NEUTRAL with an adjusted TP of RM4.60 (from RM4.05), pegging its FY18 BVPS to PB multiple of 1.3x.

FY17 net profit missed estimates. The Group's FY17 net profit missed our estimates slightly at 92.7% but was within consensus' at 95.5%. The variance was due to our underestimation of its provisions but PPOP was within our expectations.

Net profit dragged by higher provisions. The Group posted a net profit decline of -1.9%yoy on the account of higher loans provisions, which grew +96.5%yoy to RM95.0m. This was due to higher collective assessment allowance (+98.2%yoy to RM80.4m). Otherwise, it was a decent result.

Decent PPOP growth. PPOP expanded +5.8%yoy on account of its Islamic Banking income, which grew +21.7%yoy. This was due to higher Islamic net financing income. We believe that this contributed for the bulk of the +11bps yoy NIM improvement to 2.26% as NII was flat. In addition, OPEX was contained rising only +0.4%yoy from lower personnel cost (-0.7%yoy to RM427.7m).

Tepid loans growth but asset quality improved. Gross loans grew +1.5%yoy to RM39.3b, but loans from its target segment, SME, grew +9.3%yoy to RM9.8b. Despite our concern of the risk associated with SME loans, asset quality have improved from GIL ratio of 1.3% as at 4QFY16 to 1.0% as at 4QFY17.

Better liquidity. Core deposits grew +6.1%yoy to RM40.5b. However, more importantly CASA also expanded, at +4.7%yoy to RM15.5b. We believe that this had also contributed to the NIM improvement. LDR also improved from 84.2% as at 4QFY16 to 87.0% as at 4QFY17.

Embarking on a transformative journey. The management informed of two new products which it hopes to build some momentum for the Group. These are Alliance One Account and Mobile Foreign Remittance. The Alliance One Account offers clients to amalgamate their borrowings (mortgage, personal, auto finance, etc.) into one single borrowing. We believe that this product may be effective in driving the Group's loans growth. Indeed, management is targeting mid single digit loans growth for FY18 which higher than the growth achieved in FY17. Also, the Group will be embarking on a transformation, including scale up economically, branch transformation and new digital propositions. The management indicated that the total investment for the restructuring is RM94m in FY18. However, this will be compensated by cost savings and new revenue stream of RM9m and RM11m respectively. As such management has guided the following: (1) mid single digit loans growth; (2) NIM improvement by circa +5bps; (3) CI ratio of less than 52% with transformation; (4) net credit cost of 30-35bps; (5) ROE of circa 9.5% with transformation; and, (6) maintain its dividend policy.

FORECAST

We are revising our FY18 earnings downwards by -10.0% to take into account the additional investment the Group will undertake and the net credit cost.

VALUATION AND RECOMMENDATION

The Group has shown bright spots in its performance, most notably the strong Islamic Banking growth and NIM improvement. To take advantage of any momentum, the Group will embark on a transformation in FY18. This will impact its earnings and ROE. We believe that this may allow the Group to make some room for growth. Nevertheless, with FY18 in our mind, we maintain our NEUTRAL stance on AFG with an adjusted TP to RM4.60 (from RM4.05) pegging its FY18 BVPS to PB multiple of 1.3x which is its 5-year historical average PBV.

Source: MIDF Research - 1 Jun 2017