There were no major surprises from Affin’s 2QFY20 results briefing yesterday. Affin’s mid-term plan (AIM 22) targets to lift ROE to 8% which we find challenging at this stage. Affin now expects credit cost to exceed 50bps as 1HFY20 was already at 75bps. We raised FY20E net profit by 11%, underpinned by better than-expected NoII in 1H, partly offset by higher credit cost. We assumed 106bps cumulative credit cost over FY20E-FY21E. No change to our RM1.45 TP and MARKET PERFORM call. Inexpensive valuations and strong capital buffers mitigate asset quality concerns due to its high corporate exposure.

Affin held its 2QFY20 results briefing yesterday. We set out below the salient points from the meeting.

Some key focus areas of AIM 22:- (1) Focus on ROE with the target of raising it to 8% in 2022 from 5.4% in 2019; (2) Lowering funding cost by focusing on CASA and re-engineering the balance sheet; (3) Closing the gap with peers on digital banking; (4) Focus on people and productivity; and (5) Improved risk management. Management hopes to bring down the GIL ratio to 2.25% in 2022. Generally, this was consistent with the overall strategies shared during the last briefing, with the ROE target being a new addition. At this juncture, an 8% ROE seems challenging and if the operating environment remains difficult for an extended period, we would not be too surprised if the timeline for some of these targets gets pushed out further.

Weak loan demand in 1H but hopeful of a pick-up in 2H. 1H annualised loan growth was -4%, with loan demand impacted by the pandemic coupled with continued corporate loan repayments. Nevertheless, management was hopeful that with the improvement in economic activity in 2H, loan demand would pick up as well. No change to the guidance of flat loan base for FY20.

Bright spot in deposits. The contraction in loan book has allowed the group to release costlier fixed deposits (2Q: -24% YoY/-10% QoQ, mainly from corporates), and partly replaced by CASA (2Q: +16% YoY/+5% QoQ). Affin thinks some of the CASA could be due to the moratorium and thus, the growth may not be sustainable. Nevertheless, the shift in mix has helped cushion NIM pressures without sacrificing regulatory liquidity requirements (LCR: 163%; NSFR: 116%).

Update on loan moratorium. c.95% of retail customers and 50% of corporate and SME customers are currently under the loan moratorium. The targeted loan assistance package has seen 3k individual applications with 2k cases approved thus far. These applicants are mainly from the hospitality sector. Visibility with respect to asset quality is still poor and Affin only expects a clearer picture to emerge in 4Q 2020. However, given that 1HFY20 credit cost was 75bps, management now thinks FY20 credit cost would likely exceed the earlier guided 50bps. No change to the plan to raise LLC to the 70% level by end-2021 from 42% at end-2019 (2Q20: 51%). Management aims to build up the bulk of the reserves this year, leaving a cleaner slate for 2021. Note that Affin had previously said the 70% LLC will also require an improvement in GIL.

FY20E net profit raised by 11%, reflecting 30% upward revision to NoII on better-than-expected achievement in 1H, partly offset by higher opex (+8%) and revised credit cost assumption of 62bps (from 36bps). FY21E net profit tweaked down by 2%. We assumed cumulative credit cost of 106bps over FY20E-21E. FY20/FY21 DPS assumptions unchanged at 5.0 sen p.a. which translates to pay-out ratios of 25-28%.

TP and rating maintained. We maintain our MARKET PERFORM call and TP of RM1.45, which is based on our GGM-derived target FY21 PBV of 0.29x. 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. In addition, we think valuations are undemanding. A key risk to our forecasts is asset quality, where its high corporate exposure may lead to volatile earnings ahead.

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

Source: Kenanga Research - 27 Aug 2020