This article first appeared in The Edge Financial Daily, on February 16, 2016.

Affin Holdings Bhd
(Feb 15, RM2.15)
Upgrade to hold with a revised target price (TP) of RM2.30: Transferring coverage, we tweak our financial year 2015 (FY15) net profit forecast slightly higher to RM415 million from RM405 million, but lowered our estimates for FY16 and FY17 to RM465.7 million and RM490.3 million from RM526.5 million and RM555.2 million.

We are expecting FY15 to FY17 loan growth to be modest, broadening by between 3% and 5%. Commanding some 3% of the industry’s market share, competition from larger players with a more entrenched customer base could make it difficult for Affin Holdings Bhd to penetrate certain segments of the market.

Additionally, we believe the increasingly difficult operating environment has resulted in the bank growing its loans more selectively to manage credit risk. That said, we note that Affin’s loan growth has been rising, but at one to two percentage points below the industry.

The slowdown is premised on markedly softer growth, or contractions, reported in the demand for the purchase of securities, residential and non-residential mortgages and personal loans.

Margins are expected to compress further due to the rising cost of funds. We estimate net interest income to decrease slightly in FY16 before rising by some 4% in FY17. Given the competitive environment for deposits, we note that Affin’s deposit growth has also been easing.

With the loan-to-deposit ratio now above 90%, management noted that efforts will be focused on raising long-term deposits, in addition to current accounts and savings accounts. Elsewhere, our channel checks revealed that Affin has been aggressive in growing its hire-purchase portfolio through pricing.

Affin Hwang Capital announced a rationalisation exercise in 2015, following a merger of the investment banking businesses. Despite savings from a slight reduction in headcount (post one-off cost of RM30 million to RM40 million), we expect the group’s overall cost-to-income ratio to remain high at between 55% and 60% for FY15 to FY17. This will partly be attributed to the softer income growth.

Higher marketing costs due to promotional campaigns to enhance Affin’s retail presence, efforts to strengthen network by opening new branches, coupled with plans to digitise the bank could result in additional expenses for the group, going forward.

Going forward, an uncertain economic climate will continue to pose challenges in 2016. This is expected to translate into moderating demand and further stress on asset quality. Stiff competition is likely to result in a higher cost of funding and further net interest margin  compressions.

Affin is currently trading at FY16 price-to-book value (PBV) of 0.6 times, a steep discount to industry peers’ average of 1.1 times. While we believe the huge discount is justified due to its single-digit return on equity, versus peers’ average of 10% to 11%, the stock is also trading below one standard deviation of its 10-year PBV cycle.

Readjusting Affin’s TP due to the transfer of coverage, we now value the stock at RM2.30. This translates into an implied FY16 PBV of 0.64 times. With that, we upgrade Affin from “sell” to “hold” as we believe valuations are immensely attractive at current levels. — TA Securities, Feb 12