Affin’s 2Q21 net profit rose 71% QoQ on the back of positive Jaws from quicker total income growth and decline in loan loss provision. Moreover, loans growth improved, NIM widened QoQ, and GIL ratio trended down. Overall, results were within estimates and hence, our forecasts were unchanged. In our view, Affin’s risk-reward profile remains favourable as current price point is attractive (0.34x P/B at -1.0SD). Furthermore, we still believe there is a strong likelihood of value unlocking exercise for AHAM in the short-term. Maintain BUY call and GGM-TP of RM2.15, based on 0.43x FY22 P/B.

Within estimates. Affin posted 2Q21 net profit of RM118m (+71% QoQ, -8% YoY on a core basis, after stripping away modification losses in 2Q20), bringing 1H21 sum to RM187m (-26% YoY). This was in line with estimates, making up 50-51% of our and consensus full-year forecasts.

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

QoQ. Positive Jaws from quicker total income growth vs opex (+8ppt) along with the 15% decline in loan loss provision and better JV & associate contribution (+3-fold) led bottom-line to jump 71%. Sequentially, net interest margin (NIM) widened by 4bp.

YoY. Earnings fell 8%, no thanks to a 49% rise in allowance for bad loans and higher effective tax rate. We note positive Jaws were attained despite a 2% drop in top-line (investment-related income decreased 78%) as opex contracted 11% (primarily from lower personnel cost).

YTD. The 26% decline in net profit was caused by negative Jaws on the back of weak investment showing (-80%). Also, the slight 2% uptick in impaired loans provision did not help to alleviate the damage.

Other key trends. Loans and deposits growth gained pace to +7.1% (1Q21: +3.3%) and +11.4% YoY (1Q21: -0.6%) respectively. In turn, loan-to-deposits ratio improved 3ppt QoQ to 90%. As for asset quality, gross impaired loans (GIL) ratio trended down to 3.27% (-14bp sequentially) due to smaller NPL formation and larger loan base.

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 seen to stay resilient on the back of gradual economic reopening under the National Recovery Plan. 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). Moreover, we believe the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Forecast. Unchanged as 2Q21 results were within estimates.

Retain BUY and GGM-TP of RM2.15, based on 0.43x FY22 P/B with assumptions of 4.4% ROE, 6.3% COE, and 3% LTG. This is in line to its 5-year average of 0.45x but below the sector’s 0.88x; the discount is warranted given its weak ROE output, which is 5ppt beneath industry mean. In our opinion, Affin’s risk-reward profile continues to tilt favourably to the upside. We believe there is a strong likelihood of value unlocking exercise for Affin Hwang Asset Management (AHAM) in the short-term. Also, current price point is attractive (0.34x P/B at -1.0SD).

Source: Hong Leong Investment Bank Research - 27 Aug 2021