We believe AFFIN’s potentially
higher credit risks are somewhat priced in by the discount in its valuation,
which is already based on more conservative earnings and credit cost assumptions.
With a reasonable 9% ROE and its undemanding valuations (FY13E: 10.2x PER, 0.7x
P/BV), there is room for its earnings to improve. We are initiating coverage of
AFFIN with an OUTPERFORM rating and a target price of RM4.30.
Higher credit cost in the price.
AFFIN’s 32% PER discount to its banking peers, we think, could imply a credit
cost that is 59 bps higher than its peers. In other words, a substantially
higher 91 bps credit cost is already priced in for AFFIN versus the 32 bps for
its peers’ average. We estimate this level of credit cost for AFFIN is sufficient
to cover a net impairment formation of 26% of its loans each year.
Reasonable ROE and Tier 1. AFFIN’s FY12E ROE of 9% is reasonable
due to its conservative growth strategy over the past few years (loan growth
average of 10% p.a. FY08-12). AFFIN is
also reasonable capitalised with a T1 of 10.7% as at end-December 2011.
Higher beta play? AFFIN has
a sector low NPL ratio of 2.31% (4QFY11) with sufficient provision coverage of
78% (4QFY11). However, AFFIN has
relatively higher exposure to corporate loans (2011: 56% of loans). We think
this makes AFFIN a higher beta play and more geared to the economic cycle.
A conservative estimates. We
expect conservatively a 4%-5% earnings growth in FY12-13, driven by loan growth
of 10%, a falling cost-to-income ratio to 46% (from 48% in FY11), a lower
credit cost ratio assumption at 23bps and stable NIMs. The falling
cost-to-income ratio and lower credit cost going forward remain the catalyst
for potential earnings surprises later.
Valuation. We initiate
coverage on AFFIN Bank with an OUTPERFORM rating. In our view, AFFIN presents a
good and under-appreciated investment proposition. We see rooms for its further
valuation multiple expansion on the Responsible Finance theme in the coming
years. Our TP of RM4.30 is based on a targeted 1.0x of its FY2013 P/BV.
Source: Kenanga
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