Management appears optimistic and bullish during our recent conversation and maintained its FY22 financial guidance. In general, Affin shared that: (i) NCC will remain relatively elevated at 30bp in order to raise its LLC level to 90%, (ii) loans growth held up well, and (iii) NIM continues to widen. Overall, our forecasts are unchanged. In our view, Affin’s risk-reward profile continues to skew favourably to the upside as AHAM disposal along with the potential special dividends from it are re-rating catalysts. Also, Affin has been posting strong financial metrics. Moreover, current price point is attractive (0.37x P/B close to -1.0SD) and from our reverse SOP assessment, we find that its commercial banking unit is under valued. Retain BUY and GGM-TP of RM2.35, based on 0.46x FY23 P/B.

We spoke to management recently for some operational updates. In general, the tone was optimistic and bullish.

Still elevated NCC. Affin’s loan repayment assistance (RA) has fallen to 18% of total loans book (vs 27% in Dec-21). This is expected to decline further as more RAs under the PEMULIH program expire; the RA level pre-PEMULIH was only 13%. Besides, the take-up rate for URUS remains immaterial (0.2% of total loans). Separately, Affin does not have exposure to Russia, Ukraine, Europe nor commodity traders. As for O&G, it forms <1% of total loan book. That said, management will continue to build provisions to raise its loan loss coverage (LLC) level to 90% (from FY21: 68%) and thus, retained their 30bp FY22 net credit cost (NCC) guidance (vs ours: 32bp).

Sturdy top-line. Loans are still rising at robust clip (4Q21: +11%) and management guided 12% growth in FY22 (vs ours: +10%), given strong showing at the community and enterprise banking segments. For net interest margin (NIM), Affin is aiming +7bp FY22 expansion (vs ours: +2bp), spurred on by more lucrative personal financing and credit card businesses along with higher CASA contribution. Besides, management expects 2x OPR hike in FY22 and every 25bp rise in OPR would widen its NIM by 3bp on an annualized basis. That said, we gathered the current deposit taking landscape remains competitive.

Other key updates. We understand the B50 segment makes up 30% of its consumer loans book. Also, Affin shared 10-20% of its borrowers in the RA program have been missing monthly payments, indicating Covid-19 vulnerable segment is potentially only 3% of total loans. Currently, ESG financing is <1% of total loans but Affin is looking to raise this up to 4%/10% in FY22/FY25. Separately, IT-related capex is projected to be higher at RM316m vs BAU of RM150m given the rollout of: (i) Affin Delivery System, (ii) mobile banking app, and (iii) CRM 360, this year. As for the outstanding corporate exercises, AHAM disposal and Generali JV, are on track for completion in 2H22.

Forecast. Unchanged since there were no material positive/negative updates.

Maintain BUY and GGM-TP of RM2.35, based on 0.46x FY23 P/B with assumptions of 6.3% ROE, 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 0.93x; 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 as AHAM disposal coupled with the potential special dividends arising from it are re-rating catalysts. Also, Affin has been chalking in better financial metrics. On top of that, current price point is attractive (0.37x P/B near to -1.0 SD) and from our reverse SOP assessment, we calculated the market is only valuing its commercial banking unit at 0.29x P/B with c.3% ROE output (normalized ROE: 4%) vs peers 0.93x P/B with 9-10% ROE, implying undervaluation.

Source: Hong Leong Investment Bank Research - 25 Mar 2022