This article first appeared in The Edge Financial Daily on September 8, 2017

Affin Holdings Bhd 
(Sept 7, RM2.61)
Maintain add call with a target price (TP) of RM2.96: Following the analyst’s briefing on Wednesday, we are more positive on Affin Holdings Bhd because it is guiding for stronger loan growth in the second half of financial year 2017 (2HFY17) and lower gross impaired loan ratio by year end compared to end of June 17. Also, the bank stated that the Affinity transformation programme has yielded positive results in terms of margins and the loan pipeline.

There is an early positive result in which 25 projects have been initiated from the Affinity transformation programme as at last month, of which 12 projects have been completed and 13 projects are ongoing. 

We are positive on the implementation of Affinity as it would help improve the group’s earnings.

The early positive results from Affinity are the widening of net interest margins (for loans) from 2.16% in December 2015 to 2.23% in June 2017, and an increase in the stock for undisbursed mortgage loans from RM600 million in 2016 to RM3 billion now.

It explained that the 27.3% surge in its total gross impaired loan (GIL) in 1HFY17 was due to higher rescheduled and restructured (R&R) loans, which were still performing.

In 1HFY17, the R&R loans shot up from RM37 million at end of December 2016 to RM296.2 million at the end of June 2017, lifted by one R&R loan in the property (non-residential) sector.

Affin expects some of these R&R loans to be reclassified as non-impaired towards end of the year or in early 2018. Hence, the group’s GIL ratio could decline from the 2.07% level at the end of June (above the industry’s 1.65%) towards the end of the year.

To prepare itself for the adoption of Malaysian Financial Reporting Standards 9 (MFRS 9) in 2018, Affin proactively increased its regulatory reserves by 107.5% half on half (transferred from retained earnings) to RM601.3 million at the end of June. Inclusive of regulatory reserves, the bank recorded a loan loss coverage of 100.9% at June end compared to 94.3% at the end of December 2016.

We are positive on this as the high regulatory reserves would help to cushion the expected rise in provisioning upon adoption of MFRS 9 and assuage market concerns about Affin’s low coverage previously.

The bank is targeting a 6%-7% loan growth in FY17, above our projected 3%. This means that it is expecting stronger loan momentum of 3.4%-4.4% in 2HFY17 versus only 2.6% in 1HFY17. 

If the bank achieves its targeted loan growth, our net profit forecast could be raised by 2%-3% in FY17 assuming that there is no significant drop in net interest margin.

We keep our “add” call on Affin, given its attractive valuations, and benefits from its Affinity transformation programme, which has led to an increase in its margins and loan pipeline. 

Its 2018 price-earnings ratio of 8.1 times is below the sector’s average of 12 times and the lowest among the Malaysian banks under our coverage. 

We retain our FY17-FY19F earnings per share forecasts and a TP of RM2.96 based on the divident discount model. Downside risks to our call are a spike in GIL ratio and collapse in loan growth. — CIMB Research, Sept 6