Affin’s 2Q22 profit increased 25% YoY, thanks to total income growth and lower loan loss provision. Also, NIM broadened, loans growth stayed strong, and GIL ratio trended down sequentially. Overall, results were in line with estimates, but we cut FY22-24 earnings by 3-6% to reflect the divestiture of AHAM. In our view, Affin’s risk-reward profile continues to skew favourably to the upside as there is special dividends potential from AHAM divestiture and it is still printing strong financial metrics. Retain BUY and GGM-TP of RM2.35, based on 0.41x FY23 P/B.

Within expectations. Affin chalked in 2Q22 net profit of RM147m (+3% QoQ, +25% YoY), bringing 1H22 sum to RM290m (+55%). This was in line with estimates, making up 54-57% of our and consensus full-year forecasts; we see allowance for bad loans creeping up in following quarters given efforts to raise loan loss coverage.

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

QoQ. The 3% uptick in bottom-line was thanks to positive Jaws (total income growth outpaced opex by 8ppt). However, it was capped by the return of loan loss provision (1Q22 experienced ECL writeback). At the top, loans grew 3.6%, net interest margin (NIM) expanded 7bp, and non-interest income (NOII) rose 11% (due to better treasury performance and forex gains).

YoY. Total income growth (+9%) coupled with lower impaired loan allowances (-57%), led to the 25% increase in earnings. That said, the drop in NOII (-28% due to sluggish fees, investment- and forex-related showing) together with weaker AHAM contribution, prevented profit from expanding faster.

YTD. Similar to YoY performance, the 55% earnings jump came on the back of better total income growth (+5%) and lower provision for bad loans (-80%).

Other key trends. Both loans and deposits growth continued to be strong at +15.0% YoY (1Q22: +13.8%) and +19.8% YoY (1Q22: +22.9%) respectively. As such, loan-to deposit ratio remained flat QoQ at 86%. For asset quality, gross impaired loans (GIL) ratio was down to 2.28% (-15bp sequentially) due to recoveries and larger loan base.

Outlook. Following Jul-22’s OPR hike, NIM is seen to continue expand sequentially. However, the magnitude may be capped by potentially fiercer rivalry for deposits. That said, loans growth is expected to remain resilient for now, given economic recovery is strong. Separately, GIL ratio is likely to rise but we are not overly worried, since Affin has already made heavy pre-emptive provisioning in FY20-21 to cushion this impact. Moreover, FY22-23 NCC assumptions built in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. Although 2Q22 results were in line, we cut FY22-24 earnings projection by 3-6% to account for the divestiture of AHAM.

Retain BUY and GGM-TP of RM2.35, despite profit reduction as the equity base has gotten larger from the disposal gains of AHAM. Our valuation is based on 0.41x FY23 P/B (from 0.45x), with the assumptions of 5.3% ROE (from 6.2%), 8.6% COE, and 3% LTG. This is broadly in line to its 5-year average of 0.42x but below the sector’s 0.92x; the discount is fair given its weak ROE output, which is 5ppt beneath industry mean. In our opinion, Affin’s risk-reward profile continues to skew favourably to the upside as there is special dividends potential from the divestiture of AHAM and it is still printing strong financial metrics.

Source: Hong Leong Investment Bank Research - 25 Aug 2022