3QFY20 headline net profit slipped 28% QoQ (-33% YoY) on higher tax rate while the absence of the RM80m Day One Modification losses in 2QFY20 was largely utilised to book in pre-emptive loan provisions of RM70m in 3Q. With that, LLC now stands at 61%, closing the gap to the 70% target by end-2021 management shared earlier. Thus, we believe credit cost trend ahead will be largely dependent on asset quality outlook, now that “catch-up” provisions to build coverage are close to being out of the way. FY20E PATMI tweaked down by 4%, but we keep our MARKET PERFORM rating with a revised RM1.50 TP (from RM1.45).

3QFY20 PATMI slipped 28% QoQ (-33% YoY), bringing 9MFY20 PATMI to RM240m (-34% YoY) – accounting for 66% of our and 57% of consensus. We consider the results to be broadly in line with our but below consensus estimates. 9MFY20 PBT made up 76% of our FY20E PBT, but an effective tax rate of 42% in 3Q (we think this should normalise ahead) dampened overall profitability. As expected, no dividends were declared.

Results’ highlights. Excluding the Day One Modification losses incurred in 2QFY20, 3QFY20 pre-tax profit slumped 43% QoQ as loan provisions surged 109% QoQ (3QFY20 credit cost of 99bps vs 2QFY20: 48bps; 3QFY19: 37bps) and more than offset the 4% QoQ rise in pre-provision operating profit. Affin booked in RM70m in pre- emptive Covid-19 loan provisions during the quarter, which made up 62% of the net provisions in 3Q. No major issues noted with respect to asset quality as the bulk of loans was still under the automatic moratorium. GIL fell 5% QoQ (-18% YoY) due to lower residential mortgage, auto and working capital impaired loans. Thus, GIL ratio improved 20bps QoQ to 2.9% while LLC (ex-regulatory reserves) jumped to 61% from 51% in 2QFY20, closing the gap to management’s 70% LLC target by 2021.

Elsewhere, net interest income rebounded 11% QoQ (+10% YoY) as NIM rose an estimated 16bps QoQ thanks to fixed deposits being repriced down from the earlier OPR cuts. Robust markets-related income (brokerage fees and trading income) drove NoII (+22% QoQ/+99% YoY), but also resulted in higher opex (+24% QoQ/+50% YoY), i.e. higher personnel cost from trading-related incentives. Thus, CIR rose 3.9ppt QoQ to 68.5% and dampened overall pre-provision profit growth.

Loan base ticked up 2% QoQ (-1.5% YoY) thanks to consumer (mortgage, auto) and SME segments, ending a run of seven consecutive QoQ declines. CASA growth was strong (+7% QoQ/+23% YoY) and helped underpin overall deposit growth. CASA ratio rose further to 21% (3QFY19: 15%/2QFY20: 20%). Finally, group CET-1 ratio of 15% remains healthy and should comfortably support management’s plan to build up loan loss reserves. The group still has RM443m sitting in regulatory reserves.

AIM22 ROE target toned down. In its presentation slides, Affin expects the impact from the pandemic to become more visible in 4QFY20. Apart from that, its strategies are unchanged. Of note is that Affin appears to have toned down its AIM22 ROE target to 7% in FY22 from 8% (more details likely to be shared in its briefing later today). Other AIM22 targets are GIL <2.5% and CIR <55%.

FY20E net profit trimmed by 4% on a higher effective tax rate assumption of 25% (from 22%). No change to our FY21 forecasts.

MARKET PERFORM maintained with revised TP of RM1.50 (from RM1.45). Our GGM-derived target FY21E PBV has been raised to 0.31x from 0.29x after we incorporate the following revisions: (i) risk- free rate assumption of 2.7% (from 3.0%), and (ii) 25bps reduction in market risk premium assumption to reflect recent vaccines developments for Covid-19. 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 (FY21E PER and PBV of 8.4x and 0.33x, respectively) point to a balanced risk/reward profile.

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

Source: Kenanga Research - 30 Nov 2020