Affin’s 2Q20 core net profit jumped 19% QoQ, due to lower loan loss provision and effective tax rate, while asset quality held steady. That said, loans growth remained weak and NIM slipped sequentially. Overall, results beat expectations but was mainly due to better-than expected NOII; thus, we raise FY20 net profit forecast by 8% but keep FY21-22 estimates. Now, the stock’s risk-reward profile appears balance, considering its recent price weakness. Upgrade to HOLD with an unchanged GGM-TP of RM1.55, based on 0.31x FY21 P/B.

Above expectations. Excluding modification loss, Affin posted 2Q20 core net profit of RM147m (+19% QoQ, -6% YoY) which brought 1H20 sum to RM271m (-8% YoY). This was above expectations, making up 63-75% of our and consensus full year forecasts; key variance came from better-than-expected non-interest income (NOII).

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

QoQ. Core earnings jumped 19% on the back of lower loan loss provision (-54%) and effective tax rate (-8ppt). Otherwise, pre-provision profit would have fallen 30% given negative Jaws (from shrinking total income of -6% vs an opex rise of 15%). The weak top-line was due to net interest margin (NIM) slippage of 3bp, 1% contraction in loans, and softer trading income (-10%).

YoY. Conversely, core net profit fell 6%, no thanks to RM54m bad loan allowances vs the RM26m writebacks in 2Q19; if not for this, pre-provision profit increased 12% on the back of positive Jaws from better NOII (+54%); investment -related income was the main contributor (doubled).

YTD. Similar to YoY showing, core earnings declined 8% given RM171m provision for impaired loans (vs RM36m writebacks in 1H19). Again, positive Jaws from better NOII provided some cushioning impact.

Other key trends. Loans growth remained weak at -5.4% YoY (1Q20: -6.2%) while deposits slipped further to -18.5% YoY (1Q20: -11.3%). Sequentially, loan-to-deposit ratio (LDR) climbed 4ppt to 93%. As for asset quality, gross impaired loans (GIL) ratio held steady at 3.06% (-5bp QoQ), which in our opinion, resulted from the effect of loan moratorium.

Outlook. With potentially another OPR reduction (-25bp) in 2H20, we believe this will continue to exert pressure on NIM. Also, loans growth is anticipated to remain tepid as Covid-19 related headwinds drag performance. Separately, we see GIL ratio to stay at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from Affin; however, this may hide actual damage and cause a lag in non performing loan (NPL) formation if the situation does not improve rapidly or an advent of Covid-19 second wave paralyses the country again.

Forecast. We raise FY20 net profit forecast by 8% to factor in stronger NOII but keep FY21-22 estimates, as we see downward normalising investment-related income.

Upgrade to HOLD (from Sell) but with an unchanged GGM-TP of RM1.55, based on 0.31x FY21 P/B with assumptions of 4.6% ROE, 8.2% COE, and 3.0% LTG. This is below its 5-year mean of 0.49x and the sector’s 0.78x. The discounts are justifiable given its lower ROE generation, which is 1ppt and 3ppt under its 5-year and industry average. Overall, the stock’s risk-reward profile appears balance now, considering its recent price weakness and valuation is undemanding (trading close to -2.0SD P/B)

Source: Hong Leong Investment Bank Research - 26 Aug 2020