We  maintain  our  NEUTRAL  call  on  Affin  with  an  unchanged  MYR4.30 FV.  Preserving  asset  quality   still  appears  to  be  its  key  focus,  which means loans growth is likely to remain modest.  Further  details on the Hwang  IB  deal  will  only  be  forthcoming  after  financial  closure.  That aside,  we  think  net  profit  growth  will  be  under  pressure  due  to normalising credit cost.

• 2014  outlook.  Affin  guided  for  loan  growth  of  8-10%  for  2014  (2013: 7.9% y-o-y),  as the group intends to remain selective in terms of lending activities to preserve asset quality. Net interest margin (NIM) is expected to  compress  10-15  bps  due  to  pressure  from  both  asset  yields  and funding  costs.  Asset  quality  is  still  holding  up  but  management  is cautious  with  respect  to  the  high-rise  and  commercial  property segments.  Affin’s  headline  KPIs  for  2014  includes  9.2%  ROE  (2013: 10.5%),  which factors in the acquisition of HwangDBS Investment  Bank (Hwang IB) and a proposed rights issue.
• Update on Hwang IB.  Financial close for the MYR1.36bn acquisition is expected  to  be  in  April.  Management  will  only  provide  further  details regarding integration costs and synergistic benefits then.  Affin  plans to raise  gross  proceeds  of  MYR1.25bn  from  a  rights  issue,  of  which MYR1.05bn will  be used  to fund the acquisition  and around  MYR200m will be earmarked for Affin Bank’s capital needs. As such, the acquisition will  be  broadly  capital  neutral  to  the  group.  Finally,  management  does not  anticipate  the  need  for  a  voluntary  separation  scheme  (VSS)exercise this year, but does not rule this out altogether down the road.
• Update  on  negotiations  to  acquire  up  to  24%  in  PT  Bank  Panin Syariah (BPS). As it was still early days, Affin did not comment much on a potential deal.  BPS’  annualised net profit, based on its 30 Sept  2013 results, was MYR12m. Other financial ratios include  5% NIM, 8.9% ROE and gross  non-performing  loans (NPL)  ratio of 1%. We estimate  a 24% stake in BPS could cost Affin <MYR100m while the incremental net profit contribution will be <1%, ie not too significant.
• Forecasts.  We assumed loan growth of 9%, in line with guidance, but our  5bps  NIM  contraction  for  FY14  is  more  optimistic  than  Affin’s expectations.  Our FY14 ROE estimate post  acquisition and rights issue is 9.2%, in line with the KPI. We keep our numbers unchanged for now.
• Investment case. Our MYR4.30 FV (10x CY14 EPS) and NEUTRAL call are both unchanged.

Company Profile
The  principal  activities  of  Affin  are  commercial  banking  and  hire  purchase,  Islamic  banking,  investment  banking  and  stock-broking, money-broking,  fund  and  unit  trusts  management.  The  group  is  also  involved  in  life  and  general  insurance  via  its  jointly  controlled entity/associate.

Source: RHB