Review

• 9MFY16 results exceeded both ours and consensus expectations. YTD net profit surged to RM392.6mn, an increase of 44.4% from RM271.9mn a year ago. The stronger set of results were chiefly driven by better allowances although total income came largely within expectations.

• Accounting for 75% of our full year forecast, total income widened at a modest pace of 5.3% YoY. Bulk of the increase was driven by higher contributions from non-interest income (non-NII). 3QFY16 fee income jumped by close to 26% YoY, driven by increases in underwriting fees, portfolio management fees, services charges, and initial service charge fees. 9MFY16 gains from disposal of financial assets and investments along with lower MTM losses helped boost income from financial instruments up to RM81.3mn from RM40.8mn a year ago.

• Net interest income (NII) dipped after improving in 2Q. NII was impacted by the surprise OPR cut in July. Gross loans growth broadened by 2% YoY, trailing below BNM’s 4.2% YoY increase. Loans growth was driven by the SME segment while larger corporate loans was of little changed. Consumer based loans advanced at a modest pace of 4% YoY, led by advances for the purchase of securities (+29% YoY), residential mortgages (+10% YoY) and loans for the purchase of durable goods (+13% YoY).

• Total deposits expanded by 6% YoY to RM49.3bn from RM46.4bn a year ago. CASA deposit registered its 5th quarter of YoY contraction. The loan to deposit ratio dipped to 88% from 91% a year ago on the back of softer loans growth.

• Operating expenses stood little changed QoQ but increased by 5.3% YoY. The cost-to-income (CTI) ratio improved slightly to 57% from 60% in 3QFY15 on the back of efforts to keep costs lean.

• Compared to 3QFY15, total recoveries and write-backs have reduced substantially. Nevertheless, the group benefitted from much softer individual impairments in 9MFY16. This was, however, offset by additional allowances for impairment losses on financial instruments totalling RM18.7mn vs. net writeback of RM23.6mn in 9MFY15. The formation of new NPLs increased by RM37.2mn QoQ, resulting in a slight deterioration in the gross impaired loans ratio to 2.08% from 1.98% in 2Q. Meanwhile, loan loss allowances dipped to 60% (from 64% in FY15).

• The CET1 and Total Capital Ratio for Affin Bank stood at 12.8% and 15.6%. An interim single tier dividend of 3.0 sen per share has been proposed by the board.

Impact

• We cut FY16 credit charge assumption to 14 bps from 20 bps but kept FY17 and FY18 unchanged at 20 and 19 bps respectively. All other assumptions are left unchanged as YTD operating income and expenses were in line with our expectations, accounting for 75% and 74% of our full year forecast. With that, we raise FY16/17/18 net profit estimates to

Outlook

• Going forward, we expect uncertainties in the economic climate to spill over into 2017 and continue to pose challenges for the banking sector. We foresee moderating demand and further stress on asset quality. However, we are positive on the Affin’s new transformation programme. Coined the “Affinity Program,” the bank will embark on a comprehensive transformation plan to address the challenges and opportunities it currently faces in the industry. In the nearer term, efforts undertaken in the past year to rebalance the bank’s loan and deposit portfolio by reducing pricier deposits and shifted assets towards better yielding loans in the consumer segments (such as mortgages, credit cards and ASB financing) as well as the SME segment are translating to better earnings for the group.

Valuation

• We raise Affin’s TP to RM2.60/share from RM2.40/share. This represents an implied FY17 PBV of 0.70x. Affin is currently trading at FY16 PBV of 0.63x, still a steep discount compared to industry peers average of 1.15x. While we believe the huge discount is justified due to its single digit ROEs (vs. peers’ average of c. 10%), valuations look increasing attractive as the stock is trading below 1 standard deviation of its 10-year PBV cycle. BUY reiterated.

Source: TA Research - 30 Nov 2016