AFG's net profit was in line with consensus and our expectations, representing 23% of our full-year forecast. Net profit declined 4.2% y-o-y, mainly attributable to high overhead costs on human capital and technology (+11.8% y-o-y). However gross loans exceeded expectations with growth of 14.2% y-o-y. The group’s asset quality remains intact as its net impaired loans ratio improved further to 2.4%. In view of the share price run-up recently, we downgrade our call to TRADING BUY, with fair value raised to RM4.68, pegged to 1.8x FY13f P/BV.
Marginally solid. AFG’s 1QFY13 net profit declined 4.2% y-o-y and represented 23% of our full-year forecast, mainly attributable to high overhead expenses (+11.8% y-o-y) on investments in human capital and technology. This also drove cost-to-income ratio to 50.5%, however we expect to see this normalized moving forward. Net interest income grew 4.8% y-o-y, on the back of strong loans growth but was offset by NIMs at a further compression of 5bps q-o-q. Non-interest income reported an increase of 4.0% y-o-y, largely driven by transaction banking and gain from redemption of financial assets, but was however offset by unrealized foreign exchange losses from the treasury division.
Loans growth better than expected. Overall loans growth was reported at a strong 14.2% y-o-y, driven by residential mortgages (+15.9% y-o-y), business loans (+14.3% y-o-y) and consumer segment (+12% y-o-y). Loans growth outpaced customer deposits growth, which also recorded a double-digit increase of 11.7% y-o-y. Loans-to-deposit increased slightly to 81.8%, in line with management's guidance of 85% for a more effective asset liability management, a level which is still well below industry average.
Asset quality still resilient post MFRS 139. The group’s impaired loans ratio improved to 2.4% from 3.0% a year ago, with the loan loss coverage ratio improved to 86.6% from 79.9 y-o-y. For this quarter, AFG transferred RM109.7m from individual assessment allowance (IA) to collective assessment allowance (CA). We view this transfer as a one-off event as most of it consists of individual performing loans >RM1m that were parked under IA prior to implementation of FRS 139. Moving forward, management has indicated that the credit charge would be targeted at around 10bps below 1.50% which is seen at this quarter. The group’s core Tier 1 equity capital ratio stood at 11.6%.
TRADING BUY. We are imputing a higher loans growth forecast of 12.5%, up from 7.0% previously, but are adjusting our NIM forecast at 1.9% and cost of funds at 2.2%. Our fair value for the stock is raised to RM4.68 from RM4.41 previously, premised on a FY13 P/BV of 1.8x (14.0% ROE, 9.5% COE and 4% growth rate).
No change in long-term targets. Management expects to continue to maintain double-digit loans growth, underpinned by the core segments of SME loans and resilient growth from the residential mortgage loans. We also expect to see a new driver coming from a reversal in the contraction of HP financing, as management has indicated that AFG will re-enter this previously inactive business segments and the results should materialize from 2Q-3Q2013 onwards. Loans-to-deposit ratio has some room for leverage with a few ticks up to a still healthy 85% to accommodate for the aggressive loans growth. The deposits segment will be further improved by current and savings account (CASA) ratio targeted to reach 35%, as management has decided to free off the more costly fixed deposits. Another support will come from a resilient asset quality, with gross impaired loans ratio continue to ride on a trend of consistent improvement since 4QFY08
Remain SME-focus coupled with prudent management. Management also believes the SME loans portfolio will remain safely collateralized, partly attributed to the non-residential segment. AFG uses a prudent approach for loans approval to the SME customer base; they are more likely to provide loans to business operators in the downstream segment of the supply chain as the quicker time for loan repayment from this segment carries less uncertainty. The improved turnaround time for processing of loans will also help AFG to gain further market share in SME segment, as loan application to disbursement for SME financing takes approximately a week, while loans approval typically takes just 2-3 days.
Non-interest income to reach 30% of total income. With NIMs compression coupled with upward pressure on cost of funds expected to persevere, AFG will continue to drive fee income from cross-selling products across transaction banking, treasury sales and wealth management services in which its increasing SME corporate segment stand to benefit. A potential new driver to commission income will also come from commissions deriving from single and regular premium plans initiated by the eight-year bancassurance arrangement with AIA, which carries a minimal cost to AFG as the cost for recruitment and training of insurance specialist are being borne by AIA. Another potential driver may come from more lucrative deals secured by stockbroking and investment advisory divisions, however we are less optimistic on this taking into account the highly competitive landscape posed by the bigger, established players.
First interim dividend of 6.6sen a share. Management has declared a first interim tax-exempt dividend of 6.6sen per share. This represents a payout ratio of 18.9% of our FY13f net profit forecast. AFG has a dividend policy of paying up to 50% of after-tax net profits. We project a 40% payout ratio for the full year FY13, assuming strong capital ratios are retained.
Source: OSK
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