Following AFFIN’s 2QFY21 results’ briefing, management downgraded several guidances due to the ongoing economic malaise, which we believe could only ease in 4QFY21 if a full reopening of the economy is implemented. Going forward, the group sees merit in opening more physical branches to capitalise on the recovery, while an upcoming digital app will provide online presence, as well as to gain more customers and deposits. We revise our earnings in response to these revisions but maintain our UNDERPERFORM rating and GGM-derived PBV TP of RM1.30.

More cautious. Our national GDP have failed to perform as expected in the past quarters owing to persistently high levels of Covid-19 cases which led to tighter movement control responses impeding economic recovery. Hence, management reckoned that past FY21 guidances could not be easily achieved and hence proposed for certain amendments. As demand for debt is not picking up due to the lack of economic incentive (mainly SMEs), loan growth guidance has been toned down from 6% to 5% for FY21.

Following this is the concern that more accounts will require staging or be classified as at-risk if business conditions do not improve, no thanks to the prolonged economic restrictions. With this, management now raises its credit guidance to above 50 bps from 43 bps, previously. Meanwhile, asset yield is expect to plateau with deposit prices starting to become more competitive as peers are seeking the same cheaper access to funds, resulting in a lower NIM guidance of 1.80% (-10bps).

NOII customer acquisition affected by MCO. As there is still some degree of dependency towards physical interaction in wealth management and fee-based income services, NOII is not expected to be as robust so long as MCO persists. Also, we believe that the group’s trading and brokerage income is likely to pale in comparison to 2HFY20 when trading sentiment peaked.

Banking on both physical and digital expansion. In the pipeline, four new branches are expected to be opened in the months to come to add to the group’s footprint. While certain competitors are streamlining their physical presence, AFFIN believes there is still opportunity within certain areas where its brand has not gained much commercial attention. Post pandemic, management plans to roll out about five new branches per year. Meanwhile, the group will soon launch its digital app in Oct 2021 which management hopes will be a key driver in driving greater access to CASA, thereby improving their cost of funds. The app would also allow digital on-boarding to enable the group to penetrate areas where physical expansion could yet be feasible.

Post update, we lower our FY21E/FY22E earnings by 4%/1% as we incorporate the revised guidances and also tone down our NOII expectations. We believe that the economy is dependent on the country to achieve herd immunity and achieve manageable levels of new Covid-19 cases before it could safely be reopened fully. At this moment, we opine that this is only achievable at the tail end of 4QFY21.

Maintain UNDERPERFORM and TP of RM1.30. Our TP is based on a FY22E GGM-derived PBV of 0.27x (2SD below 5-year mean). The stock is typically known as the least exposed in financing risks due to its higher NOII mix against peers, but given the expectations of a normalising trading landscape, this segment could be at threat until the group is able to gain substantial growth in its NII to make up for it. In the meantime, ROE and dividend yield leave much to be desired against its peers.

Source: Kenanga Research - 30 Aug 2021