This article first appeared in The Edge Financial Daily on February 22, 2018

Affin Bank Bhd
(Feb 21, RM2.48)
Maintain add with a target price (TP) of RM2.84: Following the 25 basis points (bps) hike in the overnight policy rate (OPR) on Jan 25, 2018, Affin Bank Bhd raised its base rate by the same magnitude of 25bps to 4.1%. It increased its base lending/financing rate by 25bps to 6.96%. The changes in the above lending rates were in line with our expectations.

Meanwhile, it also increased its fixed deposit (FD) rate by 25bps across the board. This was a negative surprise as we expected an average rise of 22bps in FD rates. As such, the estimated positive impact on Affin’s financial year 2018 (FY18) to FY19 net profit could be smaller at 1% compared with between 3.2% and 3.5% expected previously based on our assumption of a hike of 25bps in lending rates and 22bps (average) in FD rates.

The need to meet the net stable funding ratio (NSFR) requirement, earliest by 2019, may have prompted Affin to be more aggressive in the pricing for its deposits. This could be the reason for the wider-than-expected increase in FD rates, in our view. Based on our understanding, Affin is among the banks that have yet to comply with the requirements of the NSFR.

We increase our FY18-FY19 earnings per share forecasts by 1% to factor in the rate hike, based on the assumptions of 25bps increases in both lending and deposit rates. This pushes up our dividend discount model-based TP from RM2.81 to RM2.84.

The rate hike could have a marginal positive impact on Affin’s earnings. For the rating, we retain our “add” call on Affin given its attractive valuations (FY19 price-earnings ratio of 7.8 times and price-to-book value of 0.5 times) and the benefits from the Affinity transformation programme. Downside risks to our call include a spike in loan loss provisioning and slowdown in loan growth. We maintain “add” with a TP of RM2.84. — CGS CIMB Research, Feb 21