Transformation Programme already in motion

In an analyst briefing yesterday, management foresees a better year ahead. With the Affinity Transformation already in motion, 32 new transformation projects have been identified to help Affin achieve new financial targets by 2020 such as: 1) ROE to increase from 8.45% in 2016 to 14-15% by 2020, 2) operating profit to almost double from RM630mn in 2016 to RM1,120mn, 3) cost-to-income ratio (CIR) to reduce by 10%-points, and 4) fee to total income mix to expand to 25-30% in 3 years. To achieve these targets, management has identified 7 pillars to: 1) spur earnings via revenue growth and cost savings, 2) strengthen the strategic foundation of the bank, and 3) improve on operational foundations.

In more details, these pillars include:

1. organising and segmenting target customers,
2. introduce new RM models, create a new call centre for sales, intensify selling at branches, create an SME sales organisation setup, launch e-wallet and enhance the digital banking strategy to strengthen delivery channels,
3. relaunch credit card business and create divisions to look in to product developments and solutions
4. improve operational efficiency and turnaround time via SME credit scorecards and ease SME credit processes
5. enhance technology and automation within the group
6. transform its people and organisation
7. strengthen performance management within the group

Setting ambitious targets

In order to achieve an ROE of 14-15%, we project that Affin would have to grow its profits at a 4-year CAGR of 28% through: 1) loans growth of between 8-12%, 2) fee income to register a sustainable growth of 12%, 3) net credit charge to be kept below 20 bps, and 4) double digits expansion in NIM. While we think these targets are achievable, we also believe the current weak market environment and intense competition in the market could dampen near term efforts. Nevertheless, coming from a low base, we believe earnings can grow exponentially if the group is able to attract a wider and more diversified customer base. We foresee Affin’s efforts in areas of segmenting customers, enhance delivery channels through its branch network and digitally as well as increase offerings in terms of products and solutions through this transformation programme could translate to better fee income and overall topline growth. Coupled with efforts to keep a lid on operating expenses, positive JAWS could lead to lower CIR.

Proposed reorganisation of group structure to enhance ROE and capital

The proposed reorganisation of the group’s current structure could also help increase ROE and strengthen the bank’s capital position via the ability to enhance business and operational synergies. According to management, the group’s fully loaded CET1 and total capital ratio is expected to improvement to

13.8% and 18.7% from 12.3% and 16.2% post the reorganisation. ROE is also estimated to increase by some 1.5% points. Management expects the entire exercise to complete by 4Q 2017. Affin is currently awaiting approval from the regulators.

Conservative assumptions imputed in our forecasts

Post incorporating FY16 results, we adjusted 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. Keeping a more conservative stance and imputing more gradual improvements, some of our key assumptions include FY17/18/19 loans and deposit growth of 4/5/6% and 3/4/5%, CIR to improve from 59% to 56% by 2019, average net credit charge of 20 bps over the next 3 FYs, GIL ratio to improve to 1.48% by FY19 and FY17/18/19 ROE of 7.2/8.8/8.8%.

Valuation and recommendation

We maintain Affin’s TP at RM3.20/share. 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 10%), valuations are attractive as the stock is trading below 1 standard deviation of its 10-year PBV cycle. BUY reiterated.

Source: TA Research - 2 Mar 2017