We continue to hold our view that earnings risks have risen a notch amid deteriorating asset quality, falling LLC and an elevated cost base. Affin’s LDR has also risen significantly, which adds to our concerns ahead, given the group’s relatively weaker deposit franchise. We retain our SELL call with a revised MYR1.80 TP (from MYR1.90, 16% downside).

Forecasts and investment case. We lower our 2016F-17F net profit by 4-7% to reflect the weaker-than-expected results and some housekeeping post results. We tweaked down our GGM-derived TP to MYR1.80, which assumes: i) COE of 10.5%, ii) ROE of 7%, and iii) 4.5% long-term growth. Our TP is based on a 2016F P/BV of 0.42x, ie at a discount to the 0.8x 10-year average. We believe the discount is fair, given 2016F-18F ROEs of 5.6-6.2%, compared to the 10-year average ROE of 8.2%. Maintain SELL.

Outlook. Looking forward, we see income growth, tighter liquidity and asset quality as key challenges banks are facing. Affin may be more vulnerable to these conditions given: i) low loan loss coverage level of 64%, ii) relatively weaker deposit franchise – its loan-to-deposit ratio (LDR) of 86% currently is significantly above its 10-year average of 76%, and iii) high cost structure.Risk. The risks include: i) stronger-than-expected loans growth, ii) better-thanexpected NIMs, iii) well-controlled costs and iv) asset quality holding up.

4Q15 net profit missed our and consensus expectations. Relative to our forecasts, cotribution from associates was lower than expected, leading to the QoQ drop in net profit. Net interest margin (NIM) was down 7bps QoQ as Affin rebuilt liquidity, but this was cushioned by stronger non-interest income. Asset quality also improved this quarter, with the gross impaired loan ratio easing 31bps QoQ to 1.9% (impaired loan formation rate of just 9bps vs. 139bps in 3Q15). Affin surprised with a final DPS of 5 sen as it typically does not declare final dividends. Full-year DPS was 7.99 sen (2014: 15 sen), which translates to a payout ratio of 42% (2014: 49%).