Affin’s  1Q14  net  profit  of  MYR143m  (-5%  y-o-y/-14%  q-o-q)  was  rather subdued mainly due to NIM pressure and lower net write-back in loan impairment allowances.  The focus remains on the acquisition of Hwang IB.  Affin guided for MYR84m in synergies over the next three years  but the  deal  is  near-term  dilutive  due  to  its  rights  issue  and  integration costs of MYR54m. Maintain NEUTRAL with GGM-derived MYR4.30 FV.

• 1Q14 results muted. Affin reported a muted set of results with 1Q14 net profit  of  MYR143m  (-5%  y-o-y;  -14%  q-o-q)  accounting  for  23% of our and consensus full-year estimates. 1Q14 net interest margin (NIM) was soft,  down  an  estimated  12bps  y-o-y  vs  our  expectation  of  5bps  NIM compression.  The  NIM  compression  was  mainly  caused  by  higher average  funding  cost,  up  12bps  y-o-y  (flat  q-o-q).  This,  however,  wascushioned by a MYR6m net write-back in loan impairment allowance (we forecasted MYR41m net charge for FY14).  
• Loan and deposit growth. Annualised  loan growth was 9% (+10% y-oy), in line with our assumption. Growth appears to have been driven by the SME segment, specifically, loans for the purchase of non -residential properties. Customer deposits declined 2% q-o-q (+8% y-o-y) mainly due to Affin releasing higher cost fixed deposits (-4% q-o-q). Current account and savings  account (CASA) deposits were  down 1% q-o-q and hence, the  CASA ratio was relatively unchanged q-o-q at 21.9% (4Q13:  21.6%, 1Q13: 20.7%).
• Asset quality.  Absolute gross impaired loans  inched down 1% q-o-q (-5% y-o-y). Thus, the gross impaired loan ratio improved to 1.92% at endMarch 14 from 1.98% at end-4Q13,  while loan loss coverage (LLC) was higher at 76% (end-4Q13: 74.4%; end-1Q13: 70.9%).
• Still  awaiting  rights  issue  pricing  details.  Pending  details  on  the pricing for Affin’s MYR1.25bn rights exercise, we have yet to incorporate the HwangDBS Investment Bank (Hwang IB) acquisition  -  completed on 7 April  2014  -  and rights issue in our model. A pro  forma impact of the acquisition and rights issue is as per Figures 17-18.
• Investment case.  We have switched our valuation methodology to the Gordon  Growth  Model  (GGM)  from  the  one  based  on  P/E.  Our  GGMbased  MYR4.30  FV  assumes  a  9.8%  cost  of  equity,  9.5%  ROE  and 4.5%  long-term growth  (previous P/E-derived FV was MYR4.30, based on target CY14 P/E of 10x). NEUTRAL call maintained.

Source: RHB