• Affin Bank’s FY23 net profit was below expectations (85% of our forecast) due to lower-than-expected net interest income.

• We see a reasonable chance of an upward reversal in Affin’s NIM in FY24F, (+18bp guided by Affin) arising from its active management of funding costs.

• Reiterate Reduce on Affin Bank as we expect a slowdown in loan growth in FY24F. Valuations are also rich at a CY24F P/E of 11.5x vs. 10.3x sector avg.

FY23 net profit below expectations

Affin Bank’s FY23 net profit was below expectations, accounting for only 85% of our forecast and 79% of Bloomberg consensus estimate. The variance against our forecast was a result of weaker-than-expected net interest income (caused by a plunge in net interest margin, or NIM). Another miss in FY23 was its DPS of 5.8 sen, which was lower than our projection of 8 sen.

Strong net profit growth yoy in 4Q23 from a low base

Net profit jumped 138% yoy in 4Q23, mainly due to a low base as 4Q22 net profit was brought down by a spike in loan loss provision (LLP) arising from the bank’s move to increase its loan loss coverage. The earnings catalyst in 4Q23 was the 93.5% yoy drop in LLP. On the flip side, its 4Q23 net interest income dwindled by 33.7%, dampened by a 59bp yoy contraction in NIM.

Bullish guidance by the bank

Affin Bank is guiding for a profit before tax (PBT) of RM1bn in FY24F, translating to a growth rate of 93.1% (from RM518m recorded in FY23). This is 44.6% higher than our FY24F PBT forecast of RM691.5m. With this, it is targeting an ROE of 7% for FY24F, much more bullish than our 4.8% forecast. Nevertheless, we think it has a reasonable chance of achieving the following FY24F KPIs: (1) loan growth of 8%, (2) gross credit charge-off rate of 20-30bp, and (3) gross impaired loan ratio of 1.9%. In addition, we see the possibility of an upward reversal in NIM in FY24F (18bp expansion as targeted by Affin), arising from its active management of cost of funds and the push to grow its CASA (current account savings accounts).

Maintain Reduce on Affin Bank

We retain our Reduce call on Affin Bank due to its rich valuations (its CY24F P/E of 11.5x is the highest in the sector; sector average: 10.3x). Potential de-rating catalyst are elevated cost of funds and potential slowdown in loan growth in FY24F. Upside risks could come from significant improvements in NIM and cost-to-income ratio in FY24-25F. We maintain our FY24-25F EPS forecasts and DDM-based target price of RM2.26 (cost of equity of 10.4%; terminal growth rate of 4%). We prefer Hong Leong Bank for exposure to Malaysian banks for its better asset quality and more attractive valuation (CY24F P/E of only 10.3x).

Source: CGS-CIMB Research - 29 Feb 2024