Affin’s 4Q19 net profit fell 15% YoY, largely within estimates; this was no thanks to the booking of loan loss provision instead of writebacks. Also, loans growth contracted further. On a brighter note, NIM and GIL ratio improved sequentially. Regardless, we still cut FY20-21 profit by 2% to factor in higher NIM slippage. Overall, Affin remains as the least profitable listed domestic bank and the risk reward profile is balanced by its inexpensive valuations. Retain HOLD but with a lower GGM-TP of RM1.85 (from RM1.90), based on 0.38x FY20 P/B.

Broadly in line. Affin registered 4Q19 net profit of RM122m (+69% QoQ, -15% YoY), which brought FY19 bottom-line to RM488m (-3% YoY). This was broadly in line with expectations, making up 95% of our and consensus full-year forecasts.

Dividend. A final DPS of 7sen (+40% YoY) was proposed. Ex-date TBD later.

QoQ. Positive Jaws (from declining opex of 8% and 3% total income growth) coupled with associate income of RM18m (instead of booking a loss RM0.2m) and downward normalizing effective tax rate of 10ppt, led earnings to grow by 69%. Also, net interest margin (NIM) widened by 24bp.

YoY. Conversely, net profit dipped 15%, no thanks to RM43m bad loan allowances vs the RM17m writebacks in 4Q18; if not due to this, pre-provision profit was up 22% on positive Jaws.

YTD. Earnings nudged down 3% given tepid top-line growth (+1%), weaker associate income (-36%), and upward normalizing effective tax rate (-2ppt). That said, a 15% fall in loan loss provision helped to lessen its profit from decreasing further.

Other key trends. Loans growth contracted further to -6.1% YoY (3Q19: -5.3%) while deposits also followed -10.9% YoY (3Q19: +1.8%). In turn, loan-to-deposit ratio (LDR) shot up 8ppt sequentially to 90%. On a brighter note, gross impaired loans (GIL) ratio fell 42bp QoQ to 3.00% as we believe 2 of its previous troubled corporate accounts in the O&G and property sectors were reclassified out from impaired status.

Outlook. NIM slippage is seen to return in 1Q20 given the recent OPR cut. However, gradual recovery should ensue in the following 3-6 months from downward deposit repricing (lagged impact) - this is expected to be short-lived seeing that Affin is a small bank and it has to compete more aggressively (pricing in particular) with bigger rivals to grow both its loans and deposits. Besides, we expect net credit cost to still continue to normalize upwards given its asset quality remains pedestrian and has a low loan loss coverage.

Forecast. Despite FY19 results were broadly in line, we cut FY20-21 profit by 2% to factor in higher NIM slippage.

Maintain HOLD but with a lower GGM-TP of RM1.85 (from RM1.90), following our profit cut and based on 0.38x FY20 P/B (from 0.39x) with assumptions of 5.0% ROE (from 5.2%), 8.3% COE, and 3.0% LTG. This is below its 5-year mean of 0.52x and the sector’s 0.92x. 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 - 28 Feb 2020