Affin’s 3Q21 net profit rose 13% QoQ on the back of lower loan loss provision. Also, NIM widened QoQ, loans growth held steady, and GIL ratio trended down. Overall, results beat expectations and hence, we raise FY21-23 profit forecasts by 7-10%. In our view, Affin’s risk-reward profile remains favourable as current price point is attractive (0.34x P/B at -1.0SD) and there is a strong likelihood of value unlocking exercise for AHAM in the short-term. Reiterate BUY call with a higher GGM-TP of RM2.25 (from RM2.15), based on 0.45x FY22 P/B.

Above estimates. Affin posted 3Q21 net profit of RM133m (+13% QoQ, +3-fold YoY), bringing 9M21 sum to RM320m (+7% YoY). This was above expectations, making up 86-88% of our and consensus full-year forecasts; key variance came from lower-than-anticipated net credit cost (NCC).

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

QoQ. The 13% rise in bottom-line was thanks to lower bad loan provision (-39%). This was however capped by negative Jaws given weak total revenue (-5%); notably, non interest income (NOII) fell 18% due to tepid fees (-16%), investment (-24%), and forex showing (-36%). That said, net interest margin (NIM) ticked up 1bp during the quarter.

YoY. Earnings tripled on the back of a 56% drop in loan loss allowances and positive Jaws; despite a 20% decline in top-line (investment-related and forex income fell 87% and 32% respectively), this was outpaced by the 31% opex contraction (primarily from lower personnel cost, -40%).

YTD. Lower provision for impaired loans (-21%) and higher income contribution from JV and associates (+94%) led net profit to rise 7%. That said, negative Jaws acted as a slight drag, again due to weak total income (-13%).

Other key trends. Loans maintained its robust growth of +6.9% YoY (2Q21: +7.1%) while deposits growth picked up steam to +16.1% YoY (2Q21: +11.4%). In turn, loan-to-deposit ratio improved 4ppt QoQ to 86%. As for asset quality, gross impaired loans (GIL) ratio trended down to 3.14% (-13bp sequentially) due to smaller NPL formation and larger loan base.

Outlook. We expect NIM to come under slight pressure due to deposit rivalry (typical year end affair) and limited scope for further CASA expansion. Also, lending growth is anticipated to stay resilient given economic reopening. Separately, GIL ratio is likely to creep upwards but we are not overly concerned 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 and consensus (above the normalized run-rate but below FY20’s level). Furthermore, we believe the Government and BNM will remain supportive in aiding troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. We raise FY21-23 profit estimates by 7-10% to account for lower NCC.

Retain BUY with a higher GGM-TP of RM2.25 (from RM2.15), following the uplift to profit estimates. The TP is based on 0.45x FY22 P/B (from 0.43x) with assumptions of 4.8% ROE (from 4.4%), 6.9% 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 fair given its weak ROE output, which is 4ppt beneath industry mean. In our view, Affin’s risk-reward profile continues to skew favourably to the upside. We still believe there is a strong likelihood of value unlocking exercise for its asset management arm in the short-term. Also, current price point is attractive (0.34x P/B at -1.0SD).

Source: Hong Leong Investment Bank Research - 22 Nov 2021