Affin’s 1Q21 bottom-line returned to the black sequentially, thanks to lower bad loans provision. Also, loans growth improved, NIM widened QoQ, and GIL ratio trended down. However, results fell short of expectations & thus, we cut FY21- 23 earnings by 6-7%. Despite the profit miss, Affin’s risk-reward profile remains favourable, in our view; we still believe there is a strong likelihood of value un locking move for AHAM in the short-term, potential divestiture of its insurance units, followed by possibility of special dividends. Retain BUY but with a lower GGM-TP of RM2.15 (from RM2.25), based on 0.43x FY22 P/B.

Below estimates. Excluding 4Q20’s modification gains, Affin posted 1Q21 net profit of RM69m (vs 4Q20: -RM10m, -44% YoY). This fell short of expectations, making up only 17% of both our & consensus full-year forecasts. Key variance came from higher than-expected provision for bad loans and effective minority interest charge rate.

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

QoQ. The 64% drop in impaired loan allowances led bottom -line to return to the black. However, negative Jaws were present due to a steeper 13% decline in total income vs opex of -4%; this came on the back of a 10% decrease in non-interest income (NOII) as fees and investment-related income fell 10% and 12% respectively. That said, net interest margin (NIM) widened 3bp sequentially to 1.9%.

YoY. Earnings dipped 44%, no thanks to negative Jaws given a 15% shrinkage in top line while opex nudged up 3%; the primary culprit was NOII, which fallen 36% due to a sharp 81% slide down in investment-related income. However, the 20% decline in bad loans provision, helped to cushion the drag on net profit.

Other key trends. Both loans and deposits growth improved to +3.3% (4Q20: +0.7%) and -0.6% YoY (4Q20: -2.4%) respectively; loan-to-deposits ratio stayed flat at 93%. As for asset quality, gross impaired loans (GIL) ratio trended downwards sequentially to 3.41% (-11bp QoQ).

Outlook. We expect NIM to remain stable premised on no OPR reduction (since it is already at an all-time low) and benign deposit competition in 2021. Also, loans growth is anticipated to continue gradually recovering. Separately, GIL ratio is likely to creep upwards but we are not overly worried as Affin has already made heavy pre-emptive provisioning in FY20 and in our view, credit risk has been adequately priced in by the market, looking at the high NCC assumption applied for FY21 by both us & consensus (above the normalized run-rate but below FY20’s level). Furthermore, we believe the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. Since 1Q21 results were below estimates, we cut FY21-23 earnings by 6- 7% to factor in higher provision for bad loans & effective minority interest charge rate.

Keep BUY but with a lower GGM-TP of RM2.15 (from RM2.25), following our profit cut. The TP is based on 0.43x FY22 P/B with assumptions of 4.4% ROE (from 4.8%), 6.3% COE, and 3.0% LTG. This is in line to its 5-year average of 0.46x but below the sector’s 0.89x; the discount is fair given its weak ROE output, which is 4ppt beneath industry mean. Despite the profit miss, Affin’s risk-reward profile remains favourable, in our view. We still believe there is a strong likelihood of value unlocking exercise for Affin Hwang Asset Management (AHAM) in the short-term, potential divestiture of its insurance units, followed by possibility of special dividends. Also, current price point is attractive (0.35x P/B at -1.0SD)

Source: Hong Leong Investment Bank Research - 27 May 2021