Despite the soft lending environment, Affin thinks it is on track to hit its 8-10%  loan  growth  target.  Asset  quality  is  still  intact  (a  positive),  but managing  NIMs  remains  a  challenge.  Going  forward,  investors  could still be focused on the impact of the recent Hwang IB acquisition. This would  be  dilutive  in  the  near  term,  due  to  integration  costs  and  the rights issue. Maintain NEUTRAL, with our GGM-derived FV at MYR3.56.

Outlook  unchanged.  We  met  the  management  of  Affin  Bank  (Affin) yesterday.  It  indicated  that  lending  activities  have  generally  been subdued.  The  mortgage  segment  has  slowed  down  due  to  the  impact from the various measures introduced to cool the property market. Also, property  developers  have  slowed  down  and  staggered  new  launches, which  resulted  in  a  drop  in  primary  market  transactions.  As  for  the business  segment,  management  thinks  project  works  from  the  various economic  programmes  have  yet  to  meaningfully  filter  down  the  value chain.  Affin  posted  1Q14  loan  growth  of  10%  y-o-y  and  management continues to guide for loan growth of 8-10% for 2014 (2013: 7.9% y-o-y). Its net interest margin (NIM) expectations were unchanged, ie 10-15 bps compression  due  to  pressure  in  both  asset  yields  and  funding  costs. Affin has seen competition for retail deposits heighten this year  but has, thus far, stayed disciplined in terms of its deposit pricing.  

Asset quality has held up well and no red flags have been noted thus far. Gross credit cost was expected at around 20bps.

M&A. Indonesia is still the preferred market for  overseas expansion but nothing is on the table at the moment. Earlier plans to acquire a stake in Bank  Panin  Syariah  (PNBS  IJ,  NR)  were  aborted  after  news  emerged that Dubai Islamic Bank (DIB UH, NR) was acquiring 25% of the former.

Forecasts.  We  have  incorporated  both  the  acquisition  of  HwangDBS Investment  Bank  (Hwang  IB)  and  the  rights  issue  into  our  numbers. Thus,  while  our  FY14F/15F  net  profit  projections  have  been  raised  by 4.8/15.9%  respectively,  we  cut  our  FY14F/15F  EPS  projections  by 8.8/10.8% respectively due to the rights issue.  

Investment case. We trim our Gordon Growth Model (GGM)-derived FV to  MYR3.56  from  MYR3.76  as  the  stock  has  gone  ex-rights.  Our previous FV was on a cum-rights basis and reflected the acquisition and rights  issue  on  a  proforma  basis.  Our  GGM  assumptions  (unchanged) are:  i)  a  cost  of  equity  of  9.8%,  ii)  ROE  of  9%,  iii)  long-term  growth  of 4.5%, and iv) FY14F book value/share of MYR4.15. Maintain NEUTRAL.

SWOT Analysis

Company Profile

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

Recommendation Chart

Source: RHB