Although Affin’s 1Q19 net profit contracted 5% QoQ, the poor showing was largely within expectations. A series of negative factors like NIM slippage, lower bad loan writebacks, and weak income contribution from JV and associates, led to the decline. Also, loans growth tapered and asset quality deteriorated. How ever, we cut our FY19-21 forecasts by 4-5% to account for higher gross credit cost guidance by management and weaker NIM prospects. Despite being the cheapest bank to own, its risk-reward profile is balance since it is the least profitable listed bank in Malaysia. Maintain HOLD but with a lower GGM-TP of RM2.30 (from 2.50), based on 0.50x 2019 P/B.

Largely in line. Affin registered 1Q19 earnings of RM137m (-5% QoQ, -3% YoY). This was largely in line with estimates, forming 26-27% of our and consensus full-year forecasts. Recall, 1Q18 represented 28% of FY18’s net profit.

Dividend. None declared as Affin only divvy in 3Q.

QoQ. Lesser bad loan writebacks (-40%) and a smaller income contribution from JV and associates (-32%) led to bottom-line falling by 5%. Also, we note that net interest margin (NIM) contracted 13bp to 1.49%. However, these were offset by non-interest income (NOII, +26%), which came in stronger on better investment income (+4-fold).

YoY. Net profit fell 3%, dragged by weak net interest and Islamic income contribution (-9%) coupled with a lower impaired loan writebacks (-37%). However, the better NOII (+15%) helped to mitigate the deceleration in profitability; this is owing to the increase in investment income (+2-fold).

Other key trends. Loans growth tapered to 4.6% YoY (4Q18: +6.3%), supported by a slower 8.3% YoY deposit rise (4Q18: +12.6%). Also, we note that CASA continued to decrease by 4.1% YoY (4Q18: -6.7%). As result, loan-to-deposit ratio (LDR) fell 90bp sequentially to 84.5%. That said, asset quality deteriorated again with gross impaired loans (GIL) ratio up 6bp QoQ to 3.31%.

Outlook. For 2019, Affin is aiming 6-7% loans growth (2018: +6.3%), 11% deposits expansion (2018: +12.6%), cost-to-income ratio (CIR) of <60% (2018: 63.4%), and gross credit cost of 30-40bp (2018: 18bp). Broadly, management also expects NIM to compress this year. While we share similar sentiment in general, CIR is the only stretched target, in our view. We reckon balancing the slow growth landscape, mild negative carry created by deposits built up, high IT spending for customer acquisition, along with cost inflation, are not easy feats at all.

Forecast. Despite results coming in line, we cut our FY19-21 earnings forecasts by 4- 5% as we observed that management has guided for higher gross credit cost by 10bp and to account for weaker NIM outlook (following the recent OPR reduction).

Retain HOLD but with a lower GGM-TP of RM2.30 (from 2.50), as we cut earnings and based on 0.50x 2019 P/B (from 0.55x) with assumptions of 5.6% ROE (from 5.8%), 8.1% COE, and 3.0% LTG. This is beneath its 5-year mean of 0.57x and the sector’s 1.14x. The discounts are justifiable given its lower ROE generation, which is 1ppt and 4ppt under its 5-year and industry average. Although this year is likely to remain as another difficult year for Affin (considering it is a bank in transition and has to navigate through a tough operating climate), we like management’s initiative trying to stay relevant in this changing and challenging banking scene. However, it is still the least profitable listed bank in Malaysia, for now, and the risk-reward profile is balanced by its inexpensive valuations.

Source: Hong Leong Investment Bank Research - 31 May 2019