Affin’s 4Q18 earnings fell 15% YoY but met estimates. The decline was owing to negative Jaws from subdued total revenue. Also, we saw NIM slippage QoQ and deterioration in asset quality. However, loans growth was robust but we still see challenging economic climate weighing down its lending activities in FY19-20. Our forecasts are unchanged. Despite being the cheapest bank to own, its risk reward profile is balance since it is the least profitable listed bank in Malaysia. Retain HOLD with GGM-TP of RM2.50, based on 0.55x 2019 P/B.

Largely within expectations. Affin booked in 4Q18 earnings of RM144m (-1% QoQ, -15% YoY), lifting 2018 bottom-line to RM503m (not comparable YoY). This was largely in line, coming in at the higher end of our forecasts by forming 105% of our full year estimates (on lower bad loan provisions) but beat consensus, making up 108%.

Dividend. None declared as 4Q is typically not a payout period.

QoQ. Net profit declined only 1% as higher net impaired loan write-backs (+17-fold) and lower effective tax rate (-2ppt to 19%), helped to conceal the weak total income performance (-9%). Essentially, net interest margin (NIM) slipped 10bp to 1.62% while non-interest income (NOII, -21%) was dragged by poorer fee (-5%) and investment related income (-66%).

YoY. Negative Jaws from subdued total revenue (-15%) was the main reason causing bottom-line to slide down 15%. Similar to QoQ, net bad loan write-backs of RM17m mitigated a much rapid drop. Across the board, NOII (-30%) suffered from declining fee-related (-21%), investment (-56%), and ‘other’ income (-33%).

YTD. Since FY17 financials do not consolidate the earnings of Affin Hwang Investment Bank, YTD results were not an apple-to-apple comparison. Hence, we will only appraise this after its briefing later today.

Other key trends. Loans growth was decent at 6.3% YoY, backed by strong deposits expansion of 12.6% YoY. However, this came at the expense of NIM, which narrowed rapidly. That said, loan-to-deposit ratio (LDR) inched downwards to 85% (-3ppt QoQ). Besides, asset quality deteriorated with gross impaired loans (GIL) ratio up 48bp QoQ to 3.25% (no thanks to the construction and non-residential portfolio).

Outlook. Like peers, we expect NIM contraction to persist on the back of retail fixed deposits competition. In FY19-20, we assumed a reduction of 1-3bp. As for loans, we expect the momentum to taper to c.5% over the next 2 years seeing the economic environment is challenging. That said, we see improving asset quality but we pencilled in a higher FY19-20 net credit charge of 29-30bp due to its low loan loss coverage of 36.5%, suggesting potential provision top-up risk.

Forecast. Unchanged as 4Q18 results were within estimates.

Retain HOLD and GGM-TP of RM2.50, based on 0.55x 2019 P/B with assumptions of 5.7% ROE, 8.1% COE, and 3.0% LTG. This is below its 5-year average of 0.59x and the sector’s 1.18x. The discounts are fair given its lower ROE generation, which is 1ppt and 4ppt under its 5-year and industry mean. While being the least profitable listed bank in Malaysia, we reckon the stock has a balanced risk-reward profile as it is compensated by inexpensive valuations; i.e. cheapest bank to own under our coverage.

Source: Hong Leong Investment Bank Research - 1 Mar 2019