Affin’s 2Q19 earnings rose 14% QoQ, beating expectations. The good showing was due to net writebacks for bad loans coupled with positive Jaws. That said, loans contracted and asset quality deteriorated further. All in all, w e raise our FY19 earnings forecast by 12% (to factor in lower net credit cost) but keep our FY20-21 estimates. Although 1H19 results appear strong, we do not think the positive net writebacks seen can be repeatable. Hence, if there is a price rally, we advise investors to sell on strength; Affin is still the least profitable listed bank in Malaysia and the risk-reward profile is balanced by its cheap valuations. Retain HOLD and GGM-TP of RM2.25, based on 0.47x 2020 P/B.

Beat expectations. Affin chalked in 2Q19 earnings of RM156m (+14% QoQ, doubled YoY), lifting 1H19 net profit to RM293m (+37% YoY). This beat estimates (due to net writebacks for bad loans), forming 56-60% of our and consensus full-year forecasts.

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

QoQ. Positive Jaws (from faster total income growth of +3ppt vs opex) and higher net writebacks for impaired loans (tripled) led to bottom-line rising 14%. Also, net interest margin (NIM) nudged up 4bp to 1.65%. However, these were offset by higher effective tax rate (normalizing upwards by 3ppt).

YoY. Net profit doubled, thanks to the RM26m net writebacks for bad loans vs the RM92m allowances made in 2Q18. Otherwise, pre-provision profit was down 1% due to negative Jaws from tepid total revenue growth (+1%).

YTD. Similar to YoY showing, earnings jumped 37% given the net writebacks booked in 1H19. If not for this, pre-provision profit only ticked up 1%.

Other key trends. Loans contracted 0.4% YoY (1Q19: +4.6%) but deposits continued to rise at 12.3% YoY (1Q19: +8.3%). As a result, loan-to-deposit ratio (LDR) fell 4ppt sequentially to 80.4%. That said, asset quality deteriorated again with gross impaired loans (GIL) ratio up 18bp QoQ to 3.49% (mainly due to property-related segments and large O&G corporate accounts).

Outlook. We see NIM slippage returning in subsequent quarters given the quick built up of expensive deposits, full 9 months impact from May-19’s OPR cut, and growing price-based competition for loans. Also, net credit cost is expected to normalise up as we reckon the recent positive writebacks seen are not sustainable given its pedestrian asset quality and low loan loss coverage.

Forecast. We raise our FY19 earnings forecast by 12% to factor in lower net credit cost (-16bp) but keep our FY20-21 estimates.

Retain HOLD and GGM-TP of RM2.25, based on 0.47x 2020 P/B with assumptions of 5.5% ROE, 8.4% COE, and 3.0% LTG. This is below its 5-year mean of 0.55x and the sector’s 1.04x. The discounts are justifiable given its lower ROE generation, which is 1ppt and 4ppt under its 5-year and industry average. Although 1H19 results appear strong, we do not think the positive net writebacks seen is repeatable. Hence, if there is a price rally, we would take the opportunity to sell on strength. 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. Affin is still the least profitable listed bank in Malaysia and the risk-reward profile is evened by its inexpensive valuations.

Source: Hong Leong Investment Bank Research - 28 Aug 2019