Affin Holdings Bhd 
(May 21, RM2.83)
Maintain “hold” with a target price (TP) of RM3: Affin Holdings Bhd’s (Affin) first quarter of financial year 2015 (1QFY15) net profit of RM30 million accounted for only 5% of our and consensus full-year estimates. 

The main reason for Affin’s weak earnings was the higher allowances for loan impairment as a result of a one-off provisioning taken at its commercial banking arm. 

We will get updates from management for further clarity on this issue. Non-performing loans (NPL) ratio rose sequentially to 1.96% from 1.82% in 4QFY14. 

NPL uptick was mainly attributable to its working capital loans segment. 

Loan loss coverage ratio dipped to 68% (compared with 76% in 4QFY14).

At the pre-provision level, earnings was in line with our expectations. 

Non-interest income was higher quarter-on-quarter (q-o-q), thanks to the investment banking division post HwangDBS Investment Bank Bhd’s acquisition. 

Net interest income declined as loan growth and net interest margin (NIM) contracted during the quarter. 

Deposits were lower across the board. Overhead expenses increased, bringing the cost-to-income ratio to 60%.

While Affin is expected to clinch decent contract financing deals for infrastructure projects, we expect loan growth to remain sluggish for the rest of the year. 

We also expect recoveries to moderate, and persistent NIM pressure. 

Our TP and recommendation on Affin are under review. 

Our previous TP of RM3 is based on the Gordon Growth Model (8% return on equity, 10% cost of equity, and 4% long-term growth). 

Risks are limited earnings upside. Earnings were historically driven by loan recoveries, and an unexpected spike in default rates would raise NPL and credit costs, and consequently, derail earnings growth. 

NIM will remain under pressure due to competition. 

Integration costs are likely to remain a feature in FY15 but the cost of doing business will likely be higher. 

Inability to extract synergies from the acquisition could pose downside risk to earnings. — Alliance DBS Research Sdn Bhd, May 21.

This article first appeared in The Edge Financial Daily, on May 22, 2015.