Affin’s 4Q21 core net profit was up 59% QoQ, thanks to writebacks of impaired loans and better total income. Also, NIM expanded sequentially, loans growth gained traction, and GIL ratio trended down. Overall, results beat expectations and hence, we raise FY22-23 earnings by 7-18%. In our view, Affin’s risk-reward profile continues to be favourable as current price point is attractive (0.35x P/B at -1.0SD). Reiterate BUY call with a higher GGM-TP of RM2.35 (from RM2.25), based on 0.46x FY23 P/B.

Above expectations. After adjusting for modification loss, Affin registered 4Q21 core earnings of RM211m (+59% QoQ; 4Q20: -RM10m), bringing FY21 sum to RM531m (+83% YoY). This was above estimates, forming 120-129% of our and consensus full year forecasts; key variance came from lower-than-expected net credit cost (NCC).

Dividend. A final DPS of 12.5sen (FY20: 3.5sen) was proposed. Ex-date TBD later.

QoQ. The 59% rise in core net profit was thanks to writebacks of impaired loans. Also, it was backed by top-line, which grew 5% given loans growth (+5%) and net interest margin expansion (NIM, +10bp). That said, this was capped by the 9% drop in non interest income (NOII) as investment and forex performance were weak.

YoY. Despite negative Jaws (total come fell 5ppt faster than opex), Affin returned to the black, thanks to bad loans writebacks. The key drag at the top was NOII (-29%) as there were weakness across the board for this line item.

YTD. Lower provision for impaired loans (-60%) and higher income contribution from JV and associates (+8%) led net profit to increase 83%. However, weak total income (-11%) was a drag capping overall growth.

Other key trends. Both loans and deposits growth gained momentum to +11.1% YoY (3Q21: +6.9%) and 17.9% YoY (3Q21: +16.1%) respectively. In turn, loan-to-deposit ratio ticked up 2ppt QoQ to 88%. As for asset quality, gross impaired loans (GIL) ratio trended down to 2.54% (-60bp sequentially) due to writebacks and larger loan base.

Outlook. We expect sequential NIM to hold steady at current levels before contracting again due to deposit rivalry. That said, this is seen to expand when BNM hikes OPR later this year. Also, loans growth is anticipated to stay resilient, considering economic recovery. Separately, GIL ratio is likely to creep upwards but we are not overly worried as Affin has already made heavy pre-emptive provisioning in FY20-21 and in our view, credit risk has been passably priced in by the market, looking at the still elevated NCC assumption applied for FY22 by both us and consensus (above normalized run-rate but beneath FY20-21’s level).

Forecast. Despite imputing the prosperity tax into our model, we still raise FY22-23 profit by 7-18% to account for the earnings beat, better top-line growth and lower loan loss provision.

Reiterate BUY but with higher GGM-TP of RM2.35 (from RM2.25), after rolling our valuations to FY23. The TP is based on 0.46x P/B (from 0.45x) with the assumptions of 6.3% ROE (from 4.8%), 10.3% COE, and 3.0% LTG. This is broadly in line to its 5- year average of 0.44x but below the sector’s 0.92x; the discount is fair given its weak ROE generation, which is 4ppt beneath industry mean. In our view, Affin’s risk -reward profile continues to skew favourably to the upside as the disposal of AHAM and the potential special dividends are re-rating catalysts. Also, current price point is attractive (0.35x P/B at -1.0SD).

Source: Hong Leong Investment Bank Research - 1 Mar 2022