9MFY22 operational PATAMI of RM61.1m (-76%) missed expectations due to the group’s decision to book higher overlays to improve loan loss coverage. Goodwill impairments of RM75m also did not help bottom line. With capital at hand, AFFIN is in the position to accelerate its core banking aspirations to meet its AIM25 goals but market-wide challenges may hinder. Downgrade to MP (from OP) with a lower GGM-derived PBV TP of RM2.25 (from RM2.45).

9MFY22 missed expectations. 9MFY22 reported PATAMI for continuing operations of RM61.1m only made up 15%/12% of our full-year forecast/consensus full-year estimate. The negative deviation was owing to 3QFY22’s booking of further provisional overlays and kitchen sinking of goodwill impairments. No dividend was declared during this quarter’s reporting, although the group had on 18 October 2022 announced a special 18.09 sen and interim 4.53 sen payment arising from the gains of disposal of (Affin Hwang Asset Management) AHAM.

YoY, 9MFY22 net interest income grew by 21% led by a higher loans portfolio (+17%) from gains in community banking accounts in addition to improved net interest margins (2.14%, +11 bps). On the flipside, non interest income plunged 32% as treasury income continued to drag. Cost wise, operating expense grew by 15% due to AHAM divestment-related expenses, bringing cost-income ratio to 65.5% (+4.0ppt). In 3QFY22, the group opted to raise its management overlays by RM220m to drive its loan-loss coverage ratio to above 100%. This led credit cost to 71 bps (+20 bps). In addition, the group also opted to impair RM75m of its accumulated goodwill during the period. All in, continuing operations came up to RM61.1m (-76%). Including the discontinued operations from AHAM following the divestment, net PATAMI arrives at RM1.16b thanks to divestment gains of RM1.05b.

Key briefing updates. The group shared that it would exceed its FY22 targets, save for their cost-income ratio aspirations of <55%. At other fronts, a 17% loans growth outperformed the industry and peers (c.7%) leading to better acquisitions in most community banking products, accounting for 60% of total books. Albeit due to its low base, the group opines its strategies could continue to yield sustainable growth, also assisted by its new AFFINMAX mobile app which is gaining share in CASA. At least for now, the group believes it is still able to be firm with its pricing methods as to not undertake less profitable accounts to meet its targets. Meanwhile, group’s decision to imbue a 40 bps management overlay was to meet its loan loss coverage aspiration of >100%, which previously stood at 80%. The additional provisional coverage is to further cushion vulnerable sectors.

Forecasts. Post results, we slash our FY22F earnings by 31% as we incorporate 3QFY22’s impairment top-ups while FY23F earnings are tweaked by -1% from model updates.

Downgrade to MARKET PERFORM with a lower TP of RM2.25 (from RM2.45). Although our GGM-derived PBV of 0.48x (COE: 11.3%, TG: 3.0%, ROE: 7%) remains unchanged, our FY23 BVPS is reduced to RM4.64 (from RM5.07) not accounting for divested operations going forward. Given the current price points, we believe the risk-reward for AFFIN is once again balanced as the group paths its traditional banking business to generate a 10% ROE by FY25. Additionally, investors may seek to realise their position post-special dividends ex-November 2022. While this medium-term trajectory could be challenged by a more competitive interest rate environment, it is somewhat balanced by a modest yield of 5%. There is no adjustment to our TP based on ESG of 3-star rating as appraised by us.

Risks to our call include: (i) higher/lower-than-expected margin squeeze, (ii) higher/lower-than-expected loans growth, (iii) better/worse-than-expected improvement in asset quality, (iv) stronger/weaker capital market activities, (v) currency fluctuations, and (vi) changes in OPR.

Source: Kenanga Research - 29 Nov 2022