Following yesterday’s briefing, AFFIN’s TP is lowered to RM1.85. While its loans growth target of 4-5% looks achievable given portfolio rebalancing tilting towards consumer and SMEs, bottom line growth will be constrained by downside pressure on NIM and elevated credit charge ahead.

To recap FY19 NP of RM489m came in below our/consensus expectations, accounting for 84%/91% of respective estimates on account of loans shrinking 6% (vs. guidance of -2%). NII fell 12% on account of falling loans (-6%), and we note the reduction of financial investments in FVOCI of RM2.9b to realise gains upon disposal of RM141m that helped NOII grow +15%.

Portfolio rebalancing. Management alluded to the decline in loan book as a strategic initiative to rebalance its loans portfolio - as big repayments came on stream with poor disbursements given the challenging environment plus low utilization; hence, the easing of these accounts. Moving forward, focus will now be on higher yielding assets - Personal Use and Credit Cards. While previously Corporate/Consumer portfolio was at 60/40, management indicated a rebalancing of SME/Corporate/Consumer of 10/40/50 with SME targeted to attain 15% in 2 to 3 years’ time. Its Islamic financing will be at 40% of total loans. FY20 loans growth is targeted at between 4-5% (c.RM2.0b). We believe this is doable given the magnitude of growth historically from household and SME loans. With its Transformation Initiatives in place enhancing products and experience, these will add traction to growth in such segments (Household and SMEs). We, however, pencilled in a conservative +4% growth given the challenging environment.

Challenging NIM ahead. NIM compression of 10bps is not a surprise as the Bank were pursuing deposits in meeting its NSFR requirements ending FY19 at 116% (+29bps). Management gave guidance of a 10bps +/- NIM. With CASA at 19%, the focus will be on building cheap funds via consumer and SME loans. Mitigating the NIM challenge further will be building higher yielding assets and growing its HP business (which the group strategically contained in the last 2 financial years. However, we view building its CASA and higher yielding assets challenging given the current economic malaise; thus, we pencilled in a 10bps compression (following management’s estimation of 25bps OPR cut leading to 5bps compression).

Normalised credit charge ahead. FY19 asset quality improves as GIL fell 50 bps (from Q3) to end at 3.0% with credit charge recorded at 11bps (or RM50m). As highlighted earlier, the high GIL was due to a couple of unresolved accounts (O&G and Real Estate) of which one has been resolved. Excluding the R&R loans, GIL would have been at 2.7%. Despite the large impaired loans, we take comfort that gross credit charge have been low in the last 7 quarters at an average 12bps vs. average credit recovery of 8bps. Given this operational efficiency (with no systemic risk seen from asset quality), management put in a credit charge guidance to 15-20bps and we understand this will be the normalised charge going forward. We pencilled in a credit charge of 20bps on account of the uncertainty and volatility environment.

FY20E earnings tweaked. We revised down our FY20E earnings by - 26% to RM484m on account of: (i) NIMs (-10bps (from +5bps), (ii) loans growth at 4% (unchanged), (iii) credit charge at 21bps (23bps previously), and (iv) CIR at 60% (unchanged) as most of its strategic initiatives were completed by 2019.

TP and rating lowered. TP lower to RM1.85 (from RM2.45) based on FY20 target PBV of 0.41x (from 0.49x) - implying a 1.5SD below mean - to account for challenges and risks ahead. With potential returns <10%, we downgrade our call to MARKET PERFORM.

Source: Kenanga Research - 3 Mar 2020