AFFIN BANK BHD

By CIMB Research Hold (No change) Target price: RM2.70

FOLLOWING an analyst briefing for Affin Bank’s second quarter financial year 2018 (Q2FY18) results, CIMB Research’s views remain unchanged.

The research house is still concerned about the risk of a potential further increase in its gross impaired loan (GIL) ratio, including rescheduled and restructured (R&R) loans in the coming quarters, in line with the industry’s trend.

The bank explained that 23.3% of its GIL at end-June comprised R&R loans, which are loans that have yet to be defaulted but are impaired due to restructuring.

Its GIL ratio increased from 2.53% at end-December to 2.81% at end-June.

However, excluding the R&R loans, its GIL ratio fell from 2.48% to 2.28% over the same period.

The bank’s GIL ballooned by 13.7% quarter-on-quarter (q-o-q) in Q2FY18.

Although this was pushed up by the 38.3% q-o-q surge in R&R loans, non-R&R impaired loans also rose by 9.2% q-o-q in Q2FY18.

Affin Bank is guiding for a gross credit charge-off rate (GCCOR) of 30 to 40 basis points in FY18.

“We estimate GCCOR was 22 basis points in the first half of 2018 and, hence, the bank is projecting lower GCCOR of eight to 18 basis points in the second half of 2018.

“To achieve this, we think the bank’s assumptions for the second half are that there will be no chunky provisioning for corporate loans, and there will be write-backs on some of the R&R loans.

“However, we are more pessimistic and project a GCCOR of 52 basis points for Affin in FY18, premised on our expectation for a rise in the industry’s GIL ratio,” said CIMB Research.

Affin Bank is targeting for loan growth of 6% to 7% for FY18, above the research house’s projected rate of 5.9%, which CIMB Research believes the bank can achieve even if a slowdown in the industry’s loan growth in the fourth quarter of 2018 is taken into consideration.

This is because the bank recorded strong loan growth momentum of 3.8% in the first half of 2018.

The research house also thinks that FY18 loan growth will remain supported by the expansion in residential mortgages while the bank is also pushing for more SME loans.

“We retain our ‘hold’ call on Affin as we are wary about the possible rise in GIL ratio in the coming quarters, in line with the industry’s trend.

“However, its valuations are attractive as FY19 price-earnings ratio of 7.9 times and price-to-book value of 0.5 times are one of the lowest in the sector.

“The upside/downside risks to our call are a pick-up or slowdown in loan and fee income growth.

“Our FY18 to FY20 earnings per share forecasts and dividend discount model-based target price of RM2.70 are intact,” said CIMB Research.