While we like the strategies Affin has mapped out as these help address the concerns we have had previously, we caution that its achievement will not happen overnight. Execution is key and we would not be surprised if the tough operating environment throws a spanner into the works. Near-to-mid term, we remain concerned of its high exposure to the corporate segment (higher asset quality risk), low LLC and significant Day One modification loss impact. UNDERPERFORM and RM1.30 TP retained.

Affin held its 1QFY20 results briefing yesterday. We set out below the salient points from the meeting.

Five high level focus areas :- (1) Re-engineering the balance sheet. This includes raising asset yields, lowering deposit cost and being more capital efficient, (2) Continued focus on CASA from improved cross selling efforts and digital offering, (3) Rapid digital transformation with a six-month time frame to reduce the gap with peers in terms of internet and digital banking, (4) Synergise its network for better focus in achieving the above, and (5) Improved risk management and cost efficiency. As pointed out by management, all these will take time, although we would not be too surprised if the current economic situation pushes the time frame to achieve some of these targets further out.

Details on loan moratorium. Approximately 95% of eligible SME as well as retail customers and 50% of corporate customers have taken up the moratorium. The sectors that have applied for moratorium vary from hospitality to retail to auto dealership, among others. While management expects GIL to trend higher from the 3.1% level at end Mar 2020, the extent of the rise is only expected to be clearer in 4Q20/early-2021. We note that the proportion of its corporate customers that have taken up the moratorium seems higher than peers (e.g. Maybank’s was at 26%). We will continue to keep a close watch on this as one of our concerns on Affin is its high corporate exposure, which means the group may be more susceptible to chunky loan provisioning should asset quality pans out worse than expected.

Building up coverage levels... In order to raise LLC to the 70% mark, this will need c.50bps gross credit cost, as estimated by management, coupled with some improvement in GIL levels. Post 1QFY20 credit charge off of 102bps (c.110bps gross), management’s guidance suggests a sharp drop off in credit cost ahead. For now, we retain our 41bps gross credit cost for FY20, although the strong 1QFY20 treasury gains and the lower-than-expected modification losses (see below) will help provide some cushion should we raise our assumption.

…given healthy capital levels. Group and Bank CET-1 ratios stood at 14.3% and 12.9%, respectively, while total capital ratios were higher at 23.1% and 22.3%, respectively. These should be sufficient to support dividend payouts ahead (2019: 28%). Affin, however, thinks its total capital ratios are too high and it has room to allow some Tier 2 capital to mature in 2022 without having to replace them, which would help lower average funding cost.

Day One modification losses estimated at RM200m on a gross basis, i.e. smaller than our earlier estimated RM268m impact to NII. Affin highlighted that after taking into account the decrease in SRR, where the proceeds are reinvested into interest yielding instruments, the net impact to NII would be a more manageable RM70m.

Forecasts unchanged. We have left our earnings forecasts unchanged, but following the strong treasury gains in 1QFY20 and Affin’s plans to redeploy the released SRR funds more effectively, further downside to our FY20E net profit from the impact of modification losses may not be as severe as the 30-35% cut required that we had anticipated previously.

TP and rating maintained. We maintain our UNDERPERFORM call and TP of RM1.30, which is based on our GGM-derived target PBV of 0.27x.

Source: Kenanga Research - 2 Jun 2020