Affin’s 1Q20 net profit fell 10% YoY, largely within estimates; this was no thanks to the booking of loan loss provision instead of writebacks. Also, loans growth contracted further, NIM slipped sequentially, and GIL ratio deteriorated. Hence, our forecasts were unchanged. Overall, Affin remains as the least profitable listed domestic bank and the risk-reward profile is balanced by its inexpensive valuations. Maintain HOLD but with a higher GGM-TP of RM1.45 (from RM1.40), as we roll valuations to FY21 and based on 0.28x P/B.

Largely within estimates. Affin posted 1Q20 net profit of RM124m (+1% QoQ, -10% YoY). This was broadly within estimates, making up 26-29% of our and consensus full year forecasts.

Dividend. None declared as Affin only divvy in 4Q.

QoQ. Positive Jaws (from quicker total income growth of 29% vs an opex rise of 14%) was erased by higher loan loss provision (tripled) and thus, earnings only grew a mere 1%. The strong top-line was due to a 78% increase in non-interest income (NOII) as investment performance spiked 4-fold. That said, net interest margin (NIM) contracted 7bp due to the 50bp OPR cut in 1Q20.

YoY. Conversely, net profit dipped 10%, no thanks to RM117m bad loan allowances vs the RM10m writebacks in 1Q19; if not for this, pre-provision profit was up 77% on the back of positive Jaws from better NOII (+81%); again, investment -related income was the main contributor (tripled).

Other key trends. Loans growth contracted further to -6.2% YoY (4Q19: -6.1%) while deposits also followed -11.3% YoY (4Q19: -10.9%). Sequentially, loan-to-deposit ratio (LDR) nudged down a tad to 89% (-1ppt QoQ). For asset quality, gross impaired loans (GIL) ratio increased 11bp QoQ to 3.11%, mainly due to its mortgage portfolio.

Outlook. NIM pressure is seen to persist into following quarters given May-20’s 50bp OPR cut and possibly another 25bp reduction in 2H20. Also, with the confluence of events from Covid-19 crisis and imminent recession, loans growth is expected to stay sluggish. Besides, asset quality is poised to remain weak but it should not spiral out of control (at least till end Sep-20); this is because Malaysian borrowers were granted 6- mth loans deferment while any restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired.

Forecast. Unchanged as 1Q20 results were broadly within expectations. Separately, we introduce FY22 estimates.

Maintain HOLD but with a higher GGM-TP of RM1.45 (from RM1.40) as we roll our valuations to FY21. The TP is based on 0.28x P/B (from 0.27x) with assumptions of 4.6% ROE, 8.7% COE, and 3.0% LTG. This is below its 5-year mean of 0.50x and the sector’s 0.78x. The discounts are justifiable given its lower ROE output, 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. Besides, it remains as the least profitable listed bank in Malaysia. However, the risk-reward profile is balanced by inexpensive valuations.

Source: Hong Leong Investment Bank Research - 1 Jun 2020