Affin’s 3Q19 earnings fell 54% QoQ, missing estimates. The poor showing was due to negative Jaws and it posted loan loss allowances instead of writebacks. Also, loans contracted further. On a brighter note, we saw NIM and asset quality improved. Given the weak set of results, we cut our FY19-21 net profit forecasts by 4-5%. Overall, Affin is still the least profitable listed domestic bank and the risk-reward profile is balanced by its cheap valuations. Retain HOLD but with a lower GGM-TP of RM2.00 (from RM2.15), based on 0.41x FY20 P/B.

Below expectations. Affin posted 3Q19 net profit of RM72m (-54% QoQ, -50% YoY), which brought 9M19 earnings to RM366m (+2% YoY). This missed expectations (due to falling loans growth, lower JV & associate income, and higher effective tax rate), making up only 67-68% of our and consensus full-year forecasts.

Dividend. None declared vs 3Q18 but Affin said they will divvy in the next quarter.

QoQ. Negative Jaws (from declining total income of 5% and 2% opex growth) coupled with loan loss provision of RM43m (vs RM26m writebacks) led to bottom-line falling 54%; the 4bp uptick in net interest margin (NIM) did little to cushion the plunge.

YoY. Similarly, net profit dipped 50%, no thanks to negative Jaws and RM43m bad loan allowances vs the RM1m writebacks in 3Q18.

YTD. Earnings nudged up 2% given lower provision for impaired loans (-91%) but this was generally erased by negative Jaws (where total revenue fell 2%), weaker JV & associate income (-65%), and higher effective tax rate (+2ppt).

Other key trends. Loans growth contracted further by 5.3% YoY (2Q19: -0.4%) while deposits tapered to 1.8% YoY (2Q19: +12.3%). However, loan-to-deposit ratio (LDR) ticked up 2ppt sequentially to 82%. On a brighter note, asset quality improved, seeing that gross impaired loans (GIL) ratio fell 7bp QoQ to 3.42%; new bad loans formation fell 29% QoQ.

Outlook. NIM is anticipated to improve further as Affin disburse more loans (low base effect), which in turn should help to lessen the negative carry impact. Also, downward deposit repricing and SRR ratio cut will support NIM recovery as well. However, net credit cost is expected to normalise up as we reckon the positive writebacks seen in 1H19 are not sustainable (as evident in 3Q19’s bad performance) given its pedestrian asset quality and low loan loss coverage.

Forecast. We cut our FY19-21 net profit forecasts by 4-5% to factor in weaker loans growth, lower JV & associate income, and higher normalised effective tax rate.

Retain HOLD with a lower GGM-TP of RM2.00 (from RM2.15), following our earnings cut and based on 0.41x FY20 P/B (from 0.44x) with assumptions of 5.2% ROE (from 5.4%), 8.4% COE, and 3.0% LTG. This is below its 5-year mean of 0.53x and the sector’s 1.01x. 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 - 5 Dec 2019