Affin’s 1Q22 core net earnings doubled YoY, thanks to ECL writeback of bonds. Also, loans growth gained momentum and GIL ratio trended down sequentially. However, NIM contracted QoQ. Overall, results were in line with estimates and thus, FY22-23 forecasts were unchanged. That said, we introduce FY24 financial projections. 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. Retain BUY and GGM-TP of RM2.35, based on 0.45x FY23 P/B.

Met expectations. After adjusting for modification loss, Affin posted 1Q22 core profit of RM143m (-32% QoQ, doubled YoY). This was within expectations, making up 27- 28% of our and consensus full-year forecasts.

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

QoQ. The 32% decline in core net profit was no thanks to negative Jaws (total income fell 9%) and higher effective tax rate (+18ppt). At the top, compression in net interest margin (NIM, -13bp) coupled with broad non-interest income (NOII, -11%) weakness, dragged performance.

YoY. Despite negative Jaws (total income dropped 2% while opex remained flat), core earnings doubled, thanks to the writeback of bonds’ expected credit losses (ECL). The key drag at the top was NOII (-30%) as there were weakness across the board for this line item.

Other key trends. Both loans and deposits growth gained momentum to +13.8% YoY (4Q21: +11.1%) and 22.9% YoY (4Q21: +17.9%) respectively. In turn, loan-to-deposit ratio declined 2ppt QoQ to 86%. As for asset quality, gross impaired loans (GIL) ratio trended down to 2.43% (-11bp sequentially) due to smaller NPL formation and larger loan base.

Outlook. NIM is seen to expand sequentially, following May-22’s OPR hike. However, the magnitude could be capped by downward normalization of CASA mix. That said, loans growth is anticipated to remain resilient for now, considering economic recovery. On a separate note, 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 to cushion this impact. Moreover, FY22 NCC assumption pencilled in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. Unchanged since 1Q22 results were in line. That said, we introduce FY24 financial estimates.

Retain BUY and GGM-TP of RM2.35, based on 0.45x FY23 P/B with assumptions of 6.2% ROE, 10.1% COE, and 3.0% LTG. This is broadly in line to its 5-year average of 0.43x 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 divestiture of AHAM and the potential special dividends are re-rating catalysts. In addition, it is printing strong financial metrics.

Source: Hong Leong Investment Bank Research - 30 May 2022