Although the post-results meeting last Friday sounded less bleak, we were not convinced enough to be more positive on the stock. Affin claimed that the bad loans provision in 3Q19 was a top-up for prudence and not due to asset quality deterioration. Besides, GIL ratio is seen to fall <3% in 2020 and gross credit cost is expected to stay benign at 8-10bp. Also, management guided loans growth to recover to +5% YoY and NIM to expand 10bp in 2020. However, we prefer to wait for signs of actual progress to be more bullish on the stock as prior targets did not come to fruition. Overall, forecasts were unchanged. Affin is still the least profitable listed bank in Malaysia and the risk-reward profile is balanced by its inexpensive valuations. Retain HOLD with a GGM-TP of RM2.00, based on 0.41x FY20 P/B.

Management held a post-results meeting last Friday. Discussions revolved around its 3Q19’s performance, outlook for remaining of the year and 2020.

Bad loan provision made in 3Q19… One of the primary reasons for its dismal 3Q19 showing was due to allowances made for bad loans (amounting to RM43m) instead of writebacks shown in 2Q19 and 3Q18. Management explained this came on the back of provisioning top-up for 2 of its existing troubled corporate accounts in the O&G and property sectors. Although we understand both were fully collateralized, MFRS9 ruling requires additional allowances for prudence.

…was not due to asset quality deterioration. In 3Q19, we observed gross impaired loans (GIL) ratio improved to 3.42% (-7bp QoQ) as new bad loans formation fell 29% sequentially. Besides, Affin shared that the 2 bad loans mentioned above have been more or less restructured but will only be reclassified out from impaired status in 2020 instead of the earlier target by year-end. Hence, the GIL ratio is expected to fall <3%. Also, heading into 4Q19 and 2020, Affin guided gross credit cost to stay at the 8-10bp range (like 9M19), considering no pocket of stress seen in asset quality.

Other key targets. Loans growth declined 5.3% YoY due to a lumpy SME repayment. However, Affin sees a pick-up in 4Q19 and 2020 to -2% and +5% YoY respectively, hinging on the low base effect and targeted effort to expand its SME lending, personal financing, ASB loans, and credit card business. Besides, these would help to generate better yields. At the same time, management will also be optimizing deposits by letting go some expensive retail products, since its NSFR was already in compliant at 121% (looking to bring this down to 110-115% level); in turn, cost of funds is likely to drop. Overall, Affin is expecting NIM to improve further and close the year at c.1.70% (from 9M19: 1.65%) while seeing another 10bp expansion in 2020.

Forecast. Post-meeting, our forecasts were unchanged despite management sharing a slew of positive guidance. We prefer to wait for signs of progress before imputing them more confidently into our model. So far, targets have not been on track.

Keep HOLD with a GGM-TP of RM2.00, based on 0.41x FY20 P/B with assumptions of 5.2% ROE, 8.4% COE, and 3.0% LTG. This is below its 5-year mean of 0.53x 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. In general, it is still a laborious period for Affin (since it is a bank in transition and has to navigate through a tough operating climate). However, we laud management’s initiative of trying to stay relevant in this changing and challenging banking scene. That said, Affin remains as the least profitable listed bank in Malaysia (for now) and the risk-reward profile is balanced by inexpensive valuations.

Source: Hong Leong Investment Bank Research - 2 Dec 2019