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This article first appeared in The Edge Financial Daily on December 6, 2017

Affin Holdings Bhd
(Dec 5, RM2.28)
Maintain add with an unchanged target price of RM2.81:
Affin Holdings Bhd hosted a conference call yesterday for its third quarter of financial year 2017 (3QFY17) results. We are relatively more positive about the bank following the conference call as: i) the bank expects a drop in its gross impaired loan ratio in 4QFY17; and ii) it shared some information about potential cost savings from the voluntary separation scheme (VSS) implemented in 3QFY17.

The bank said that the high volatility in its earnings this year was mainly due to the implementation of its transformation programme. The total operating costs increased significantly in nine months of  FY17 (9MFY17) due to new hires to improve certain businesses of the bank, such as credit card and small and medium enterprises banking. We believe the benefits of these will only be seen in the longer term, starting from FY18 onwards.

In 3QFY17, Affin implemented a VSS to retrench about 350 employees. The total one-off cost for the VSS was RM48 million. While Affin did not provide details of potential cost savings from the VSS, it said that the payback period would be two to two-and-a-half years. Based on this, we estimate cost savings of between RM19 million and RM24 million per annum from FY18 onwards.

Affin’s gross impaired loans (GIL) jumped by 32.5% in 9MFY17 to RM976.7 million at end-September 2017. The bank stated that GIL was lifted by high restructured and rescheduled (R&R) loans of RM318.7 million at end-September 2017 versus only RM37 million at end-December 2016. Impaired loans, in fact, fell by 6% in 9MFY17 to RM658 million at end-September 2017.

One of the key market concerns for Affin is its weak loan loss coverage of 35.4% (excluding regulatory reserve [RR]) at end-September 2017, the lowest among the local banks. In 9MFY17, it actively built up its RR from RM289.9million at end-December 2016 to RM632.3 million at end-September 2017. Inclusive of RR, its loan loss coverage touched 100% at end-September 2017. This would assuage the market’s concerns over inadequate coverage. — CIMB Research, Dec 4
 

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