Maintain NEUTRAL with a revised MYR3.30 TP (8% upside). Affin’s 3Q14 results  were  below  our  and  consensus  estimates  due  to  higher-thanexpected overheads  and credit cost.  That said, 3Q14 net profit  surged 27% QoQ, underpinned by stronger operating income (NIM expansion, higher non-interest income) and lower credit cost. Overheads, however, stayed elevated, partly due to integration costs.

Affin’s 3Q14  net profit of MYR142m (-18% YoY,  +27% QoQ)  missed estimates, with 9M14 net profit of MYR397m (-18% YoY) accounting for 65-66% of our and consensus full-year estimates. Overheads  and credit cost were higher than expected. 

Results  highlights.  The  main  positive  in  3Q14  results  was  the higher operating income (+11% QoQ), driven by: i) loan growth picking up pace (see below), ii) stimated 7bps QoQ net interest margin (NIM) expansion mainly  due  to  the  repayment  of  bridging  loan  for  the  Hwang  IB acquisition,  and iii) +16% QoQ rise in non-interest income, led by higher gains from sale of investments. Credit cost (annualised) was also lower at  13bps  vs  2Q14’s  30bps. Otherwise,  overheads  rose  further  (+15% QoQ) mainly due to MYR24m integration costs (+7% QoQ ex-integration costs). Asset quality also deteriorated with absolute gross impaired loans up 3% QoQ and YoY (see Figure 5). Loan loss coverage, however, was broadly stable at 76.6% (end-2Q14: 75.3%; end-3Q13: 75.4%).

Loan  and  deposit  growth.  Loan  base  was  up  3%  QoQ  and  9%  YoY (2Q14:  flat  QoQ,  +7%  YoY),  with  the  pickup  due  to  the  corporate segment.  However,  annualised  growth  of  7.7%  was  below  the  8-10% target.  Customer  deposits  grew  4%  QoQ  and  10%  YoY  while  Affin’s balance  sheet  remained  fairly  liquid  with  the  loan-to-deposit  ratio  at 79.5% (2Q14: 79.8%; 3Q13: 80.4%). 

Dividend. Affin surprised with a higher-than-expected net interim DPS of 15  sen (3Q13: 15  sen, net) vs  our net DPS forecast of  11.5  sen. This translates  into a net payout ratio of about  50% vs  our 36% assumption. We do not expect a final dividend.

Forecasts  and  investment  case.  We  lower  our  FY14-15  net  profit projections  by  6%  p.a.  due  to  the  weaker-than-expected numbers. We also introduce our FY16F numbers in this report. Our GGM-derived TP is cut  to MYR3.30  (from MYR3.50)  on the back of the  earnings revisions above, a roll forward in valuations and an update in GGM parameters. Our GGM assumes: i) revised COE of 10% (from 9.8%), ii) ROE of 8.7% (from 9%), and iii) 4.5% long-term growth. Maintain NEUTRAL.

Source: RHB