Review

• FY16 results exceeded both ours and consensus expectations. Full year net profit surged to RM579.8mn, an increase of 51.7% from RM382.2mn a year ago. The stronger set of results were chiefly driven by markedly better allowances although total income and operating expenses came within expectations.

• Accounting for 103% of our full year forecast, total income widened at a decent pace of 7.4% YoY. Bulk of the increase was driven by higher contributions from Islamic banking operations and non-interest income (non-NII). FY16 fee income jumped by some 20% YoY, spurred by increases in portfolio management fees, corporate advisory fees, commission, guarantee fees, services charges, and initial service charge fees. Stronger profit from disposal of financial assets and investments along with MTM gains helped boost income from financial instruments to RM109.6mn from RM61.2mn a year ago.

• Net interest income (NII) widened, after slipping in 3Q due to the surprise OPR cut in July. Gross loans was of little changed YoY. Rising 0.6% YoY, loans and advances were supported by the SME segment (+37.4% YoY). However, the increase in SME loans was muted by a steep 22% decline in the larger corporate loans. Consumer based loans advanced at a modest pace of 5% YoY, led by increases for the purchase of securities (+32.6% YoY), residential mortgages (+10.4% YoY) and credit cards (+8.7% YoY).

• Total deposits expanded below 2% YoY to RM51.5bn from RM50.5bn a year ago. The loan to deposit ratio dipped to 86% from 91% a year ago, on the back of softer loans growth.

• Operating expenses rose 2.2% QoQ and 5.3% YoY. The cost-to-income (CTI) ratio improved slightly to 59% from 60% in FY15 on the back of efforts to keep costs lean.

• Compared to FY15, total recoveries and write-backs have reduced substantially. Nevertheless, the group benefitted from much softer individual impairments (IA) and higher IA write-backs in FY16. This was, however, offset by additional allowances for impairment losses on financial instruments totalling RM43.7mn vs. RM17.6mn in FY15. The formation of new NPLs improved by RM225.2mn YoY, resulting in better gross impaired loans ratio of 1.67% vs. 1.90% recorded in FY15. Meanwhile, loan loss allowances (including regulatory reserves) stood at 94.3%.

• The CET1 and Total Capital Ratio for Affin Bank stood at 12.6% and 16.2%.

Impact

• Incorporating FY16 results, we adjust our FY17 and FY18 net profit estimates higher to RM570.9mn and RM644.1mn. We foresee profit to increase by some 8% in FY19 to RM697.1mn. Note that we may further refine our assumptions and forecast for Affin pending an analyst briefing later today.

Outlook

• Going forward, we remain 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 RM3.20/share from RM2.90/share on the back of the upward revision to our earnings projections. This represents an implied FY17 PBV of around 0.9x. Affin is currently trading at FY17 PBV of 0.7x, still a steep discount compared to industry peers average of 1.17x. While we believe the huge discount is justified due to its single digit ROEs (vs. peers’ average of c. 10%), valuations are attractive as the stock is trading below 1 standard deviation of its 10-year PBV cycle. BUY reiterated.

Source: TA Research - 1 Mar 2017