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Tuesday, March 8, 2016

Affin Holdings - NIM Remains Under Pressure



Highlights

  • Loan growth is guided at 6-8% in FY16 (vs 6.8% achieved in FY15), underpinned by the consumer segment (in particularly, hire purchase and mortgage financing).
  • NIM to remain under pressure. Following a 13bps decline in NIM in FY15, management expects NIM to remain under pressure in FY16 as competition for deposits remains intense for the first 2 months of FY16 (and it sees possibility of deposit competition intensifying further in the coming months). While management has plans to expand its CASA base (from 19.2% FY15) through various initiatives, we believe such plans may be challenging to yield favourable result amidst the current tight liquidity environment.
  • Asset quality to improve from FY16. The AQ deterioration in FY15 (evidenced by higher GIL ratio and credit cost) came largely from the SME segment and contract financing. While operating environment will likely remain challenging, management expects its asset quality to improve (with credit cost guided to lower to 20bps from 44bps in FY15, and GIL ratio to trend lower) as it believes the lumpy provisions incurred in FY15 are non-recurring. The group also highlighted that it is unaffected by the oil & gas sector downturn, as the sector only accounts for circa 2% of its loan portfolio.
  • Embarking on new transformation plan. Management highlighted that it is embarking on its new transformation plan (which spans from 2016-2020), and more details will be disclosed in due course.
  • LCR stood at above 70% as at Dec 2015.

Risks

  • Unexpected jump in impaired loans, lower than expected loan growth and intense competition from bigger players.

Forecasts

  • Unchanged.

Rating

SELL
Negatives
  • - Investors’ perception and delinquency track record, one of the lowest NIM, ROE and deposit franchise (CASA only 21% of total) but highest percentage of fixed rate loans among peers and Short-term drag and dilution from acquisition of Hwang (transaction and integration costs) and the subsequent rights issue to fund the acquisition.
Positives
  • - Improving asset quality and Tier-1 capital purely equity, acquisition of Hwang enhancing its market share in broking, Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa RM67bn (circa half of the next largest bank, AMMB).

Valuation

  • Target price maintained at RM1.75 based on Gordon Growth with ROE at 6.3% and WACC at 8.3%.
Source: Hong Leong Investment Bank Research, 08 March 2016

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