We retain our NEUTRAL call on Affin, with a revised MYR2.15 TP (from MYR2.35, 8% downside). We believe asset quality will increasingly be on the forefront of investors’ concerns ahead, as we head into softer macro conditions. We note that Affin’s impaired loans have ticked up this year due to the corporate segment, and see further asset quality issues as a key downside risk to our numbers.

Watching out for asset quality issues ahead. We believe asset quality will increasingly be on the forefront of investors’ concerns ahead as we head into softer macro conditions. Post the Global Financial Crisis (GFC), Affin’s loan growth of 12% (2009-2014) was above system loan growth of 11%, driven by loans to corporations. Generally, we believe asset quality risk is higher for corporate loans, given the chunky nature of such loans. We note that Affin’s impaired loans have been on the rise this year and there was some lumpy provisioning made in 1Q15 due to two corporate accounts.

Forecasts. We tone down our 2015F-2017F operating income by up to 3% as we think markets-related income may not recover meaningfully anytime soon, given the softer macro conditions. We also raise our 2015F/2016F/2017F credit cost assumptions to 43bps/25bps/25bps from 38bps/12bps/13bps respectively to factor in asset quality issues. Overall, we reduce our 2015F/2016F/2017F net profit projections by 3%/11%/12% respectively. 1H15 group cost-to-income ratio (CIR) was 60%. While we believe Affin will need to address the high CIR, our forecasts do not take into account any cost restructuring initiatives at this juncture.

Investment case. Following the earnings revisions above, we lower our GGM-derived TP to MYR2.15 from MYR2.35. The assumptions in our GGM include: i) a COE of 10.5%, ii) long term growth of 4.5%, and iii) a revised sustainable ROE assumption of 7.5% (from 7.8%). Our TP is based on a 2016 P/BV of 0.5x, ie at a discount to the 0.8x 10-year average. We believe the discount is fair given that 2015F-2017F ROEs are projected at around 5.7-6.6%, compared to the 10-year average ROE of 8.5%. In our view, much ahead will depend on how well the group’s asset quality holds up. The high CIR will also need to beaddressed and a cost restructuring exercise may help provide a lift to ROEs ahead. Maintain NEUTRAL for now.