Affin’s  4Q14  results  were  ahead  of  our  and  consensus  estimates, thanks to lumpy recoveries during the quarter. Maintain NEUTRAL, with an unchanged MYR3.30 TP (12% upside).  Looking ahead,  2015 will see the  first  full  year  incorporating  the  Hwang  IB  acquisition,  but  Affin’s bottomline  growth  would  be  dampened  by  our  expectations  of  credit costs moving towards more normalised levels.

Affin’s  4Q14  net  profit  of  MYR209m  (+25%  YoY;  +47%  QoQ)  was ahead  of  estimates,  with  2014  net  profit  of  MYR605m  (-7%  YoY) accounting for 105% of our and 108% of consensus 2014 forecasts. The key  variance  was  due  to  lumpy  recoveries  amounting  to  MYR81m  in 4Q14,  leading  to  a  net  writeback  in  loan  impairment  allowance  of MYR16m  for  the  full-year  vs  our  assumed  MYR46m  loan  impairment charge.

Results highlights. The main positive in the 4Q14 results was the 15% QoQ rise  in  pre-impairment operating  profit  (+27%  YoY, largely  due  to consolidation  of  Hwang IB),  driven  by: i)  stable  sequential  loan  growth (see below), ii) estimated 4bps QoQ net interest margin (NIM) expansion due  to  higher  average  asset  yield,  and  iii)  a  18%  QoQ  decline  in overheads  due  to  lower  personnel  and  integration  costs  (overheads decreased  by  12%  QoQ  on  ex-integration  costs).  Non-interest  income, however, sunk by 19% QoQ (+67% YoY) due to tougher treasury market conditions and weaker forex income.

Loan and deposit growth.  Affin’s loan base was up 3.6% QoQ or 9.6% YoY (3Q14: 3.4% QoQ or 8.8% YoY) with lending to SMEs growing by ahealthy  12.6%  QoQ  or  30.3%  YoY.  Customer  deposits  grew  3%  QoQ and  7% YoY,  while Affin’s balance sheet remained fairly liquid with the loan -to-deposit ratio at 80% (3Q14: 79.5%; 4Q13: 77.9%).

Asset quality  was stable  with absolute gross impaired loans lower by1% QoQ but up 1%  YoY (see Figure 5). Affin’s loan loss coverage  was also broadly stable, at 75.6% (end-3Q14: 76.6%, end-4Q13: 74.4%).

Forecasts  and  investment  case.  We  updated  our  model  for  the  fullyear results and lowered our  2015-2016  net profit forecasts  by  3%  per annum to reflect credit costs trending to more normalised levels after the net writeback enjoyed in 2014. We also introduce our  2017F  numbers. Our  Gordon  Growth  Model  (GGM)-derived  TP,  however,  remains unchanged at  MYR3.30. Our GGM assum es: i) COE of 10%, ii) ROE of 8.7%, and iii) 4.5% long-term growth. Maintain NEUTRAL.