INVESTMENT HIGHLIGHTS

• Earnings for 1HFY17 were within ours and consensus' expectations.

• Strong NOII growth main contributor to earnings growth.

• Net profit expansion was moderated by higher credit cost. However, this could be deliberate.

• Strong gross loans growth outpaced by deposits.

• Asset quality deteriorated slightly but not a concern at the moment.

• No change to forecast.

• Maintain BUY with unchanged TP of RM3.30 PBV of 0.7x.

Net profit came in within expectations. The Group posted 1HFY17 net profit of RM268.6m which was within ours and consensus' expectations. It was 45.9% and 47.9% of respective full year estimates.

Net profit growth contributed by strong NOII expansion. NOII for 1HFY17 grew strongly at +49.6%yoy supported by increase in fee income and trading income. These incomes expanded +37.9%yoy to RM314.7m and +150%yoy to RM101.9m respectively. In our opinion, this shows that the strategy laid out by the management to concentrate on income is bearing fruit. Besides NOII growth, Islamic Banking income also grew strongly (+21.7%yoy), while NII showed stable growth of +3.6%yoy.

Higher provisions moderated earnings growth. Credit cost increased +36bps yoy to 0.63% for 1HFY17. This was the result of higher provisions which was due to higher individual impairment allowance (IA). IA rose +77.0%yoy to RM47.3m. This could be due to the management taking some proactive provisioning or deterioration in certain accounts. Pending further information from the management, we opine it is the latter as we believe the management could be taking advantage of the strong PPOP growth.

Solid loans growth... Gross loans as at 2QFY17 grew +4.6%yoy to RM45.3b contributed mainly by mortgages. The loans for residential property purchase expanded +14.3%yoy to RM7.71b. However, SME loans declined -6.0%yoy to RM12.1b, possibly as a result of competition.

... but deposits increase keeps outpacing. Deposits grew +9.9%yoy to RM51.1b. However, the deposit growth was fuelled by fixed deposits where it grew +22.9%yoy to RM34.4b. Surprisingly, this had not led to significant NIM compression. We believe that this was due to better loans pricing which was able to compensate the impact of fixed deposits growth. It could also be due to the Group's ability to better price its funding cost.

Slight concern on asset quality... but we believe that is a possibility that it could be due to proactive impairments. Impaired loans increased +9.3%yoy to RM939.4m, where the bulk of the increase came from the real estate sector. This sector's impaired loans rose twice-fold to RM327.8m. However, we do not think that this was due to mortgages as the impairment in this segment fell -1.6%yoy to RM200.6m. We estimate that GIL ratio increased +9bps yoy to 2.07%.

Pockets of opportunity still present. In our previous meetings, the management indicated that FY17 will continue to be challenging for the Bank and the industry. The Group will implement a selective and cautious approach towards asset growth. However, we believe that the pockets of opportunity still present for Group as evident by its 1HFY17 performance. We believe that the Group transformation program instituted at Affin Bank and Affin Islamic Bank are showing the intended results.

FORECAST

We make no change to our FY17 and FY18 forecast.

VALUATION AND RECOMMENDATION

We continue to be encouraged by the Group’s future prospect. We believe that the transformation program continues to have an impact as evident by the NOII and mortgage loans growth. 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. Impairments and provisions increased in the quarter but pending any further information, we opine that this could be deliberate. However, we maintain our view that the Group is building its niche and we opine that this will ensure future profitability. Therefore, we maintain our BUY call for the stock, with an unchanged TP of RM3.30 based on pegging our FY18 BVPS forecast to PBV of 0.7x.

Source: MIDF Research - 5 Sept 2017