1QFY20 headline net profit appears to be a strong beat relative to our forecast (but in line with consensus) due to outsized treasury gains that more than offset the spike in credit cost (to 102bps). Pending further details as to the sustainability of these items, our numbers are unchanged for now. A high exposure to corporates (higher asset quality risk), low LLC and significant Day One impact sees us maintaining our UNDERPERFORM call and TP of RM1.30 for now.

Strong start. Affin reported 1QFY20 CNP of RM124m (-10% YoY/+1% QoQ), accounting for 37%/26% of our/market full-year estimates. Despite appearing to be a strong beat, the results were skewed by a surge in Non-Interest Income (NoII) (+81% YoY/+78% QoQ), thanks to stronger treasury income, partly offset by a spike in credit cost to 102bps (1Q19: -8bps/4Q19: 40bps) as Affin continued to build up loan loss coverage levels. We await further details from Affin’s briefing later today on the sustainability of both NoII and credit cost levels. Note that our forecast has also partly incorporated Day One Modification losses (est. RM268m impact to Net Interest Income (NII)) Affin is expected to incur in 2QFY20.

Results’ highlights. Apart from NoII, NIM was another positive. We estimate an expansion of 24bps YoY and 4bps QoQ in NIM as Affin continued to shed costlier deposits and allowed the LDR to rise to 88% from 84% in 1QFY19 (4QFY19: 89%). Otherwise, loan base continued to shrink (-6% YoY/-1% QoQ) mainly due to consumer (-4% YoY/-2% QoQ, dragged by the auto portfolio) and corporate banking (-11% YoY/- 1% QoQ), partly offset by growth from the SME segment (+2% YoY and QoQ). Deposit growth eased by a faster clip YoY at -11% (flat QoQ), due to the abovementioned reason although CASA trend the other way (+10% YoY/-6% QoQ). CASA ratio stood at 18% (1QFY19: 14.5%/4QFY19: 19%). Opex growth also appears elevated at +9% YoY/+14% QoQ, but CIR improved to 53% (1QFY19: 64%; 4QFY19: 60%) thanks to the stronger NoII.

Gross impaired loans ticked up 3% QoQ (-12% YoY), with the sequential rise due to auto and property (both residential and non residential) loans. With the spike in credit cost, LLC continued to rise to 46% from 42% in 4QFY19 and 36% in 1QFY19. GIL ratio of 3.1% remains elevated, relative to peers. That said, its group CET-1 ratio of 14.3% is healthy and, whilst the build up in LLC levels (ex-regulatory reserves) will see profitability taking a hit, capital levels should remain comfortable given that the group still has RM672m in regulatory reserves to help absorb the higher loan allowances ahead.

Earnings maintained for now pending a management briefing later today. In its presentation slides, Affin’s 2020 headline guidance are as follow:- (i) flat loan growth, (ii) deposit growth of 2-3%, (iii) CIR <60%, and (iv) gross credit cost of c. 50bps. Our FY20E gross credit cost is at 40bps but given the strong 1Q NoII, we think there may be upside to our NoII projection. Ex-Day One losses, we have penned in 2bps NIM expansion YoY.

TP and rating maintained. For now, we maintain our UNDERPERFORM call and TP of RM1.30, which is based on our GGM-derived target PBV of 0.27x. While we are positive on its decision to raise LLC levels (ex-regulatory reserves), this will likely continue to be a drag on earnings going forward. Meanwhile, loan base continues to contract and with corporate loans making up 38% of its loan book, we see higher asset quality risk vs consumer focused banks. Finally, the impact of Day One modification losses is sizeable.

Risks to our call are: (i) higher-than-expected-margin, (ii) stronger than-expected loans growth; (iii) better-than-expected asset quality; and (iv) M&A news flow or corporate exercise.

Source: Kenanga Research - 1 Jun 2020