INVESTMENT HIGHLIGHTS

• We believe that the Group is building its niche in the sector.

• Customer centricity will be the focus, while moving to an income based approach from asset based approach. Includes growing fee income and cross-selling of products.

• Selective in growing assets. Emphasising on SME and mortgage for affordable house segment. Loans for affordable housing could be a catalyst given high demand for this housing segment.

• “Affinity” transformation program will drive the change and catalyst for growth.

• Pockets of opportunities in FY17.

• Continue to be enthused by prospect. Maintain BUY with increased TP of RM2.85 (previously RM2.50) with PB multiple of 0.6x on FY17 BVPS.

Building its niche - key takeaways from our company visit. We visited Affin Holdings Bhd yesterday and met with Group CEO, En. Kamarul Ariffin and Mr. Ramanathan Rajoo, CFO for Affin Bank Bhd for new development regarding the Group and Affin Bank. The key takeaways were as follows:

• The Group aspires to be a customer centric, well operating and efficient banking group. We were surprised that it is not concern with market share.

• Refocusing from an asset growth approach to an income growth approach. This is to be done through focusing on asset quality, right product mix and rebalance of assets and liabilities.

• “Affinity” transformation program to drive the changes and refocus at Affin Bank level first before Group level transformation. We believe that this is a wise strategic move as Affin Bank is the core business for the Group.

• Its relatively small size is an advantage as it allows the bank to be nimble to institute change. We believe that the impact can already been seen.

• FY17 will be challenging but there will be pockets of opportunity.

Customer centric emphasis. The management indicated that the new focus is towards building a customer centric organization. As such, it will be focusing on building its banking franchise. This entails rebranding, investment in infrastructure and rethinking its strategy. What we found surprising was that the Group is not fixated on growing market share in terms of asset size as the norm for banks but favours enhancing income growth.

Refocusing its approach to growing income. Besides customer centricity, the Group is also moving to a new direction by focusing on an income based approach rather than the traditional asset based approach. This means that the Group will be concentrating on growing quality assets, and realigning its assets and liabilities. Indeed, this was evident by the slowed loans growth momentum of +1.8%yoy to RM43.1b as at 3QFY16. We understand that the Group had exited from unprofitable assets such as the revolving credit segment. However, this was replenished by profitable segment, such as the SME loans and mortgages for affordable homes, which management indicated will be the future thrust. For example, SME loans and mortgages grew strongly by +40.3%yoy to RM12.3b and +9.7%yoy to RM6.96b as at 3QFY16 respectively. We like the fact that the Group will be concentrating on loans for affordable homes as we believe that the demand for this segment is high and hence the potential. Other initiatives also include growing fee income, managing funding cost through CASA expansion and cross-selling of products. We believe that CASA expansion will be key to income growth where CASA ratio needs to grow from the 18.1% posted as at 3QFY16.

“Affinity” program will be the driver. The aspiration of the Group meant that there would have to be implications to its operations and organization. As such, a transformation program was launched in FY16 for its banking subsidiaries Affin Bank Berhad and Affin Islamic Bank Bhd called “Affinity”. We believe that this is a wise strategic move as Affin Bank is the core business for the Group. This program is for the period FY16 to FY20. The blueprint for the Bank’s transformation comprises seven key pillars with 32 transformation projects covering business scope, operations enablers and performance management. Amongst the initiatives that we believe is essential is investment in IT infrastructure as this will give the Bank platform for cost savings initiatives. For example, management indicated that it plans to increase its presence by adding its branches to between 150 and 200 branches, from 108 branches currently. However, the footprint of the branch will be smaller and staffing minimal leading to lower establishment cost. This can only be achieved through the use of technology. In our opinion, other essential initiative includes enhancing its digital banking positioning, is in line with its aspiration to become the preferred bank for SMEs and millennials.

Potential initial higher cost, but will be compensated by income uplift. Investment will need to be made to ensure success of its “Affinity” program. Therefore, we would not be surprised if OPEX growth will be maintained at elevated level. OPEX grew +5.3%yoy for 9MFY16. We are forecasting OPEX growth of +5.0%yoy for FY16 and FY17 respectively. However, the initiative is expected to result in an income uplift, compensating for the OPEX growth. For example, 9MFY16 CI ratio was maintained at 60.2% level due to total income growth. In addition, we saw some improvement as the 3QFY16 CI ratio was lower by -2.6ppts yoy and -3.1ppts qoq to 57.2%.

Relatively small size is an advantage. The management believe that its relatively small size allows it to be nimble to institute change. We echo this sentiment as we believe that any changes instituted by the Group will have minimal disruption to its operations. Moreover, we believe its total asset size of approximately half of its nearest upper competitor also allow it to monitor asset quality more closely.

Pockets of opportunity in FY17. Management indicated that FY17 will continue to be challenging for the Bank and the industry. However, it believes that there will be pockets of opportunity. As such, management estimates loans growth of lower-to-mid single digit. This is slightly lower than our forecast of mid-to-high single digit growth. Nevertheless, aligns with the Group’s selective and cautious approach towards asset growth. We believe that the Group will be in a good position to take advantage of any upswing in conditions with transformation instituted at Affin Bank and Affin Islamic Bank.

FORECAST

We maintain our forecast for FY16 and FY17 for now, pending FY16 result expected to be released next month.

VALUATION AND RECOMMENDATION

Maintain BUY. Since we upgraded the stock to BUY in our 3QFY16 result review, the share price have appreciated +9.3%. However, we continue to be enthusiastic by the Group’s future prospect. We believe that the transformation program is having an impact, as evident by 9MFY16 PPOP +5.1%yoy growth. This growth was attributed to the growth of +5.3%yoy in total income from higher NOII and Islamic Banking income. In addition, we expect OPEX to start trending downwards in 2HFY17 and CI ratio to improve. We like the fact that the Group is focusing on mortgage for affordable housing segment given the high demand for this property segment. We believe that the Group is building its niche and this will ensure profitability. Therefore, we maintain our BUY call for the stock, with an increased TP of RM2.85 (from RM2.50). Our increased target price is based on increasing our PBV to 0.6x, which is 1 standard deviation below its average 5-year PBV, from 0.5x, which is 1 standard deviation below its average 3-year PBV. We believe that the increase in timeframe for our average PBV is justified as we believe that conditions may be improving, whereas the average PBV in the shorter period coincides with a period of depressed valuation.

Source: MIDF Research - 19 Jan 2017