Affin posted 3Q22 core loss of RM94m, no thanks to negative Jaws and higher loan loss provisions. That said, NIM expanded, loans growth stayed strong, and GIL ratio trended down sequentially. Overall, results were below estimates and we cut FY22-24 profit forecasts by 14-45% to account for higher impaired loans allowance and lower NOII. Now, the risk-reward profile of the stock has become more balanced, in our opinion. Reduce to HOLD with lower GGM-TP of RM2.20 (from RM2.35), based on 0.41x FY23 P/B.

Missed estimates. Excluding goodwill impairment, divestment gains and related opex, Affin posted 3Q22 core loss of RM94m (vs profit of RM147m/RM133m in 2Q22/ 3Q21), bringing 9M22 sum to RM196m (-39%). This was below expectations, forming 37-39% of our and consensus full-year forecasts; key variance came from higher-than-expected loan loss provisions and softer-than-anticipated non-interest income (NOII).

Dividend. None declared as Affin now looks to divvy semi-annually in 2Q and 4Q.

QoQ. Bottom-line swung into the red due to negative Jaws (opex grew 13ppt quicker than total income) and higher provision for impaired loans (+7-fold). The jump in opex (+19%) was caused by the spike in personnel (+28%) and admin (+75%) costs. Also, NOII was weak (-2%) given softer fee income and trading performance. That said, net interest margin (NIM) expanded 2bp during the quarter.

YoY. Similarly, negative Jaws driven by elevated opex (+35%) across the board and higher bad loan allowances (+5-fold), dragged Affin into losses. On top of these, NOII was subdued (-22%, no thanks again to weak fee and trading income), contributing to the poor results performance as well.

YTD. Likewise, earnings fell 39% given negative Jaws (opex outgrew total income by 7ppt) and higher loan loss provisions (+20%).

Other key trends. Loans growth gained momentum to +16.6% YoY (2Q22: +15.0%) but deposits lost traction to +11.3% YoY (2Q22: +19.8%). In turn, loan-to-deposit ratio (LDR) nudged up 4ppt sequentially to 90%. As for asset quality, gross impaired loans (GIL) ratio improved 37bp QoQ due to recoveries and larger loan base.

Outlook. We see smaller sequential NIM expansion given: (i) bulk of the FD typically will be repriced 6-9 months from the first OPR hike (kickstarted in May-22), (ii) CASA being consumed and substituted to FD, along with (iii) price competition for FD. That said, loans growth is expected to stay resilient for now. 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 and 3Q22 to cushion this impact.

Forecast. We cut FY22-24 profit estimates by 14-45% to account for higher impaired loans provision and lower NOII. Besides, we tweak up FY22 payout to incorporate the 18.09sen special DPS into our model.

Reduce to HOLD with lower GGM-TP of RM2.20 (from RM2.35), following the profit cut and special DPS that lead to smaller BVPS. The TP is based on 0.41x FY23 P/B (same as before) with assumptions of 4.8% ROE, 7.4% COE, and 3.0% LTG. This is in line to its 5-year average of 0.42x but beneath the sector’s 0.90x; the discount is fair given its weak ROE output, which is 5ppt below industry mean. In our opinion, Affin’s risk-reward profile has become more balanced, seeing that share price has performed strongly in recent times and there are no new positive catalysts to drive it even higher. Also, sector tailwinds are dissipating and investment fatigue is building up towards the banking sector, hence, should limit price performance going forward.

Source: Hong Leong Investment Bank Research - 29 Nov 2022