INVESTMENT HIGHLIGHTS

• Earnings for Affin Holdings Bhd within expectations

• Affin Bank Bhd taken over listing status

• Lower earnings due to higher OPEX and provisions

• OPEX affected by voluntary separation scheme

• Income performance was strong, supported by NOII and Islamic Banking

• Robust gross loans and deposits growth

• Under review pending briefing today

• Maintain BUY with TP under review

Affin Holdings Bhd earnings within expectations. Affin Holdings Bhd, the previous financial holding company for the Group reported a FY17 net profit of RM534.9m which was within ours and consensus' expectations at 102.9% and 95.3% of respective full year estimate. It has since delisted with the listing status taken over by Affin Bank Bhd in a reorganization completed in February CY18. The remainder of our review will be based on the result of Affin Bank Bhd as the new financial holding company for the Group.

Net profit declined on higher OPEX. The Group (Affin Bank Bhd) FY17 earnings fell -10.0%yoy to RM417.9m. The earnings declined was due to higher OPEX and provisions.

OPEX increase due to transformation cost. OPEX rose +34.6%yoy to RM934.3m contributed by higher personnel cost. This was due to the VSS program launched to rationalise the headcount. Personnel cost went up +55.5%yoy to RM606.3m, while the VSS amounted to RM46.5m.

Higher provisions from higher IA. We estimated credit cost increased +12bps yoy to 0.19% for FY17. IA grew +36.5%yoy to RM111.0m, which could possibly mean deterioration of asset quality of certain accounts. We understand that this could be a continuation of R&R in several accounts with the majority in the property sector. Previously, management expect these accounts to return to performing. It is possible for the loans to be reclassified in the next 6 month. Hence, we expect that credit cost may normalised only in FY18.

Strong income growth. Total income grew +17.8%yoy to RM1.56b. The strong income growth moderated the increase OPEX and was supported by expansion in Islamic Banking income and NOII. These grew +22.5%yoy and +69.0%yoy to RM334.3m and RM370.9m respectively. The rise in NOII was due to fee income and trading income which was not accounted for prior to the reorganization (having accounted for at Affin Holdings Bhd previously rather than Affin Bank Bhd). Meanwhile, NII growth was decent at +2.8%yoy to RM855.3m due to robust gross loans growth and possibly better loans pricing. Interest income grew +1.7%yoy to RM2.37b.

Robust gross loans expansion, in tandem with deposits growth. Gross loans as at 4QFY17 grew +7.0%yoy to RM46.1b. The main driver was mortgages with loans for residential property purchase went up +19.6%yoy to RM8.47b. Meanwhile, deposits grew almost at the same pace at +6.9%yoy to RM50.9b. However, we are disappointed to see that the growth was mainly fuelled by fixed deposit which grew +29.3%yoy to RM34.3b. While we understand the Group had possibly managed to secure better loans pricing, the fixed deposit growth may have led to slight increase in interest expense.

Earnings expected to recover in FY18. We believe that there are still pockets of opportunity still present for Group. For example in Islamic Banking and NOII. The higher cost incurred will normalise as the Group continue with its Affinity transformation program. Hence, we expect that earnings will recover in FY18.

Source: MIDF Research - 1 Mar 2018