The conference call with management last Friday was not inspiring enough to tilt us to be more positive on the stock. Guidance like loan and deposit growth in 2019 was cut. Also, the positive net writebacks for bad loans in 2Q19 is not repeatable. Although GIL ratio is seen to improve by year-end (from recoveries), there would not be any major writebacks from this as well. Overall, we cut our FY19-21 net profit forecasts by 2-3%, after reflecting management guidance and its soft 2Q19 operational trends. Affin is still the least profitable listed domestic bank and the risk-reward profile is balanced by its cheap valuations. Retain HOLD with a lower GGM-TP of RM2.15 (from RM2.25), based on 0.44x FY20 P/B.

Management held a post-results conference call last Friday. Discussions revolved on its 2Q19’s performance and outlook for remaining of the year.

Non-recurring writebacks. Recall, 2Q19 better-than-expected results was thanks to net writebacks for impaired loans (tripled QoQ and it made allowances amounting to RM92m in 2Q18). Management explained this was due to lending reduction during the quarter (-1.8% QoQ, -0.4% YoY), leading to reversal of expected credit losses in the stage 1 performing loan bucket; it is non-recurring in nature, unless loan repayment continues to outstrip lending disbursement.

GIL ratio to improve without significant writebacks. To recap, Affin’s asset quality weakened in 4Q18 as gross impaired loans (GIL) ratio shot up sequentially to 3.25% (from 2.77%) given two bad corporate accounts in the O&G and property sectors. We understand restructuring efforts are still ongoing and by year-end, recoveries can be expected to improve GIL ratio by 75bp. However, management shared that there would not be any significant writebacks as these bad loans were fully collateralized, with minimal initial provisions made in the first place.

Cut some key targets. With the muted 1H19 showing, Affin has toned down its 2019 loan and deposit growth guidance to 1-2% (from 6-7%) and 3-5% (11%) respectively. Although lending has contracted so far, chunky corporate borrowings are expected to fuel expansion in 2H19. As for deposit growth, management wants to let off the pedal since it is already in compliant to the net stable funding ratio requirement (NSFR) of >100%. The remaining targets, on the other hand, were kept unchanged: 60% cost-to income ratio and 30-40bp gross credit cost. Besides, management guided 2019 net interest margin to slip 3bp despite 1H having already fallen 20bp; the 2H recovery is seen to come from loans growth, discipline price-based rivalry for retail deposits, and gradual downward repricing in fixed deposits, in tandem with the OPR cut in May-19.

Forecast. Post-conference call, we cut our FY19-21 net profit forecasts by 2-3%, after incorporating management guidance and its soft 2Q19 operational trends like slower loan and deposit growth. Also, we used a lower NIM assumption (factoring in another -3bp) as we were too optimistic, employing a slimmer contraction before this.

Retain HOLD but with a lower GGM-TP of RM2.15 (from RM2.25), following our earnings cut and based on 0.44x FY20 P/B (from 0.47x) with assumptions of 5.4% ROE (from 5.5%), 8.4% COE, and 3.0% LTG. This is below its 5-year mean of 0.55x and the sector’s 1.00x. The discounts are justifiable given its lower ROE generation, which is 1ppt and 4ppt under its 5-year and industry average. For the rest of FY19, it remains as another laborious period for Affin (seeing it is a bank in transition and has to navigate through a tough operating climate). However, we like its initiative of trying to stay relevant in this changing and challenging banking scene. For now, it is still the least profitable listed domestic bank and the risk-reward profile is balanced by its inexpensive valuations.

Source: Hong Leong Investment Bank Research - 3 Sept 2019