Affin’s 1HFY13 results were within our and consensus expectations as a  MYR31m  loan  impairment  writeback  helped  to  cushion  its  lacklustre operating  income  growth.  Our  NEUTRAL  call  and  MYR4.40  FV  (10x CY14  EPS)  remain  unchanged.  We  think  its  near-term  focus  will  be  on the Hwang-DBS bid but the associated risks include overpaying for the acquisition and potential dilution if fresh equity is needed.

- 2QFY13  results  in  line  with  estimates.  Affin’s 2QFY13  net  profit  of MYR159m  (+13%  y-o-y;  +6%  q-o-q)  was  within  our  and  consensus expectations,  with  1HFY13  net  profit  of  MYR310m  (+1%  y-o-y) comprising 52% of our and 51% of consensus FY13 net profit projections respectively. Similar to the previous quarter, it enjoyed a net writeback in loan  impairment  allowances  (MYR18m  vs  1QFY13:  MYR13m). Annualised  pre-impairment  operating  profit,  however,  was  10%  below our full-year estimates.

- Results  highlights.  Positives  were:  i)  net  interest  margin  (NIM)  was broadly  stable  q-o-q  and  y-o-y  as  the  increase  in  average  funding  cost was  largely  offset  by  a  higher  average  asset  yield  and  loan  to  deposit ratio  (LDR),  ii)  overheads  remain  tightly  controlled.  Thus,  its  2QFY13 cost-to-income  ratio  (CIR)  dipped  to  46.9%  (1QFY13:  47.7%;  2QFY12: 47.4%),  iii)  a  net  loan  impairment  writeback  for  the  quarter.  This  was mainly  due  to  a  low  individual  allowance  charges  and  continued recoveries, and iv) continued improvement in asset quality. However, the uptick in loan growth was below industry growth - a mild negative.  

- Loan and deposit growth. Loan growth picked up pace, up 3.3% q-o-q (vs 1QFY13: +0.3% q-o-q), but its 8.7% y-o-y growth was below system loan  growth  of  9.1%  y-o-y  while  its  annualised  loan  growth  of  7%  was below our 10% assumption. Nevertheless, Affin said its loan pipeline was strong  and  was  optimistic  growth  in  2HFY13  would  be  even  better. Meanwhile, customer deposits rose by a slower pace of 6.5% y-o-y (1% annualised).  We  believe  this  was  partly  deliberate,  in  order  to  manage NIMs.

- Asset quality. The gross impaired loan ratio improved by 13bps q-o-q to 2.09% while loan loss coverage (LLC) was at 73.7% vs the system gross impaired loan ratio of 1.96% and 100% system LLC.

- Forecasts  and  investment case.  No  change  to  our  earnings  forecasts and fair value of MYR4.40 (10x CY14 EPS). Maintain NEUTRAL.

Source: RHB