• Still BUY, new MYR2.20 TP from MYR2.30, 15% upside and c.8% FY24F yield. 1H23 net profit of MYR262.2m met expectations, forming 48% and 50% of our and Street full-year estimates. While guidance for NIM and ROE were toned down to reflect the YTD performance, management is still confident in Affin’s loans growth prospects and asset quality position. Its 0.4x P/BV appears attractive against a 5.8% ROE target and c.8% yield.

• Results review. 2Q23 net profit of MYR113.2m (-23% YoY, -24% QoQ brought 1H23 total to MYR262.2m (-9.5% YoY). The drop was mainly due to an absence of Affin Hwang Asset Management contributions, as profit from continuing operations showed a 3% increase. Key items to note were acute NIM pressure (-43bps from FY22 level) and higher opex (+7% YoY), though partially mitigated by higher non-II (+75% YoY). 1H23 ROE of 4.9% fell short of the initial 7% target, which has since been toned down to 5.8%.

• Sharp NIM contraction. 2Q23 NIM of 1.57% was a 19bps drop QoQ. This was largely due to a 101bps rise in the average cost of funds – though management explained that c.25bps came from an issuance of a second series of additional Tier-1 bonds worth MYR500m in advance of the expiry of the first series. The bank revised its FY23 NIM target to 1.86% from 2.11%, implying a 15bps YoY compression.

• Asset quality. The GIL ratio eased to 1.78% (1Q23: 1.96%, 2Q22: 2.28%) after large write-offs of transport vehicle GILs (-77% QoQ, -78% YoY). The enterprise GIL ratio showed a large 125bps QoQ uptick to 5.25%, though we understand this largely came from one account that went impaired. Management raised its year-end GIL ratio target to 2% from 1.9%, as it has begun observing early signs of stress in the mortgage, real estate and manufacturing books. The bank currently has c.MYR600m in overlay provisions to cushion the impact on the P&L of the expected NPL uptick.

• Loans and deposits growth. YTD loans growth of 5% is slightly behind the bank’s 12% target (maintained), but Affin’s existing loans pipeline – particularly among corporates – appears healthy. Elsewhere, deposits grew 10% YTD, spearheaded by placements from government agencies and business enterprises. The launch of the bank’s mobile application in September should help its CASA gathering efforts, which is positive for the long-term trajectory of NIM.

• We lower FY23F-25F earnings by 2% to factor in a sharper NIM squeeze, though offset by better markets-related and associates income. Our TP is lowered to MYR2.20, and includes a 2% ESG premium per our in-house ESG scoring methodology. We continue to like Affin for its undemanding valuation and solid long-term growth strategies, including its expansion into Sarawak.

Source: RHB Securities Research - 28 Aug 2023