Directionally, 2QFY20 headline net profit trended as expected – down 57% YoY and 45% QoQ due to a combination of Day One Modification Losses (RM80m), NIM squeeze from OPR cuts and higher overheads, but 1HFY20 net profit tracked slightly above estimates as treasury gains stayed healthy in 2Q. We keep our RM1.45 TP but upgrade our call to MARKET PERFORM as current valuations suggest a balanced risk/reward profile.

Healthy treasury gains led to a slight estimate beat. Affin reported 2QFY20 CNP of RM67m (-57% YoY/-45% QoQ), bringing 1HFY20 CNP to RM191m (-35% YoY) or 53%/58% of our/market full-year estimate. We consider this to be ahead of expectations, given that 2Q saw the recognition of the abovementioned Day One modification losses, which we had factored in. As expected, no dividends were declared.

Results’ highlights. The sequential drop in earnings was due to a combination of: (i) Day One Modification losses, and (ii) lower treasury gains, albeit still above historical quarterly run rates. Hence, while 2QFY20 non-Interest Income (NoII) was down 6% QoQ, YoY growth was a hefty 54% with higher overheads (+23% YoY/+15% QoQ) from higher personnel costs due to, we believe, salary revisions for unionised staff. The above, however, were cushioned by lower credit cost of 48bps (2QFY19: -20bps/1QFY20: 102bps) and improved contribution from JV/associates.

Stripping out the Day One Modification losses, 2QFY20 pre-tax profit was flat QoQ (-20% YoY). Pre-impairment operating profit was down 30% QoQ (+12% YoY) due to weaker operating income and upward pressure on opex, offset by lower credit cost and improved contribution from JV/associates. We estimate NIM compressed by 11bps QoQ due to the impact of the 100bps cut in OPR in 1HFY20, partly cushioned by the release of fixed deposits and rise in LDR to 92% from 88% in 1QFY20 (2Q19: 79%). Otherwise, loan base continued to shrink (-5% YoY/-1% QoQ) mainly due to consumer (-3% YoY/-1% QoQ, dragged by the auto portfolio) and corporate banking (-2% YoY/-4% QoQ). Affin has continued to manage liquidity to cushion NIM pressure, as seen from the 10% QoQ (-24% YoY) decline in fixed deposits but CASA showed resilient growth (+16% YoY/+5% QoQ) and thus, CASA ratio rose further to 20% (2QFY19: 14%/1QFY20: 18%). Meanwhile, 2QFY20 CIR (ex-modification loss) was 65% (2QFY19: 62%; 1QFY20: 53%) although on a cumulative basis, CIR of 58% (1H19: 63%) is tracking management’s 60% target.

GIL fell 3% QoQ (-17% YoY), aided by the loan moratorium, we believe. The decline was largely broad-based, except for higher impaired loans for the purchase of securities. However, with loan base shrinking, GIL ratio was stable QoQ at 3.1% but LLC continued to rise to 51% from 46% in 1QFY20 (2QFY19: 33%). Group CET-1 ratio of 14.7% remains healthy and, whilst the build up in LLC (ex-regulatory reserves) towards the 70% guided level will see profitability taking a hit, capital levels should remain comfortable as the group still has RM602m in regulatory reserves to help absorb the higher loan allowances.

Earnings maintained for now pending a management briefing later today.

TP maintained at RM1.45, which is based on our GGM-derived target FY21E PBV of 0.29x. That said, post a seemingly better-than-expected set of 1H numbers and weak share price performance, we think valuations are now fair and hence, upgrade our recommendation to

MARKET PERFORM from UNDERPERFORM. In our view, Affin’s capital strength provides ample headroom for the group to absorb the required loan impairment allowances ahead with respect to the impact from the pandemic as well as to build up LLC. This is balanced by our concern regarding asset quality, where its high corporate exposure may see volatile earnings and keep bottom-line at depressed levels ahead. We think current valuations point to a balanced risk/reward profile.

Source: Kenanga Research - 26 Aug 2020