Affin’s 3Q20 core net profit declined 62% QoQ due to higher loan loss provision and effective tax rate. However, GIL ratio nudged down, loans growth improved and sequential NIM expanded. Overall, results missed estimates due to higherthan-expected bad loans provision. Thus, we cut our FY20-22 net profit forecast by 3-18%. While trading at an attractive price point (P/B at -1.5SD), in our view, Affin is a riskier investment proposition, given less resilient asset quality. Also, it remains as one of the least profitable local listed bank. Retain HOLD but with a higher GGM-TP of RM1.65 (from RM1.55), based on higher 0.32x FY21 P/B.

Missed expectations. Excluding modification loss (in 2Q20), Affin posted 3Q20 core net profit of RM49m (-62% QoQ, -33% YoY), which brought 9M20 sum to RM300m (- 18% YoY). This fell short of expectations, forming only 64-72% of our and consensus full year forecasts; key variance came from higher-than-expected bad loans provision.

Dividend. None Declared as Affin Only Divvy in 4Q.

QoQ. Core earnings fell 62% on the back of higher loan loss provision (doubled) and effective tax rate (+23ppt). Otherwise, pre-provision profit rose 4% given stronger total income growth (+17%); this was due to net interest margin (NIM) broadening by 26bp, robust fees (+15%) and trading income (+29%).

YoY. Similarly, core net profit fell 33% no thanks to bad loan allowances, which tripled and higher effective tax rate (+11ppt); if not for these, pre-provision profit jumped 39% given better top-line (+46%) from fees (+25%) and investment-related income (+3x).

YTD. Again, core bottom-line declined 18% due to larger provision for impaired loans (+40x). That said, positive Jaws from NOII (+77%) provided some cushioning impact.

Other key trends. Both loans and deposits growth improved to -1.5% (2Q20: -5.4%) and -13.0% YoY (2Q20: -18.5%) respectively. However, loan-to-deposits ratio (LDR) remained at 93%. As for asset quality, gross impaired loans (GIL) ratio improved 20bp QoQ because of increased recovery efforts.

Outlook. We see subsiding NIM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NIM recovery. That said, loans growth is seen to stay tepid for now as Covid-19 related headwinds drag near-term showing but should pick up pace 6-12 months down the road. Separately, we expect GIL ratio to stay at low levels in 1H21, since troubled borrowers can obtain targeted assistance from Affin; however, this may hide actual damage and lead to a lag in NPL formation if the situation does not improve swiftly. As such, Affin is likely to raise their pre-emptive provisioning in the short-haul but it will drop and normalize progressively.

Forecast. We reduce our FY20-22 net profit forecast by 3-18% to factor in high-thanexpected bad loans provision.

Retain HOLD call but with a higher GGM-TP of RM1.65 (from RM1.55), despite our profit cut and based on higher 0.32x FY21 P/B (from 0.31x) with assumptions of 4.3% ROE (from 4.6%), 7.0% COE (from 8.2% to reflect risk-on mode and sector rotation into recovery stocks), and 3.0% LTG. This is below its 5-year mean of 0.47x and the sector’s 0.86x. The discounts are justifiable given its lower ROE generation, which is 1ppt/4ppt beneath its 5-year/industry average. While trading at an attractive price point (P/B at -1.5SD), in our view, Affin is a riskier investment proposition, given less resilient asset quality. Also, it remains as one of the least profitable local listed bank.

Source: Hong Leong Investment Bank Research - 30 Nov 2020