FY22 net profit from continuing operations came in at RM199.8m (-54%), missing expectations on softer overall fundamentals. However, the full year dividend of 30.39 sen is in line. Post-disposal, the group is confident that its core banking operations are in the position of strong growth as its loans book expansion looks highly encouraging. Wider CASA penetration could also benefit with lowering funding cost. Maintain OUTPERFORM and GGM-derived PBV TP of RM2.25.

FY22 reported numbers a huge miss. FY22 reported net profit for continuing operations of RM199.7m, missing our full-year forecast by 27% and consensus full-year estimate by 42%. The negative deviation here is likely due to the overly bullish expectations for non-AHAM (Affin Hwang Asset Management) operations post disposal. Meanwhile, a final 7.77 sen dividend was declared, amounting to a total full-year payment of 30.39 sen (inclusive of special dividends from AHAM’s disposal). We deem this to be closely in line with our anticipated 29.1 sen full-year payment.

YoY, FY22 net interest margin rose by 19% thanks to the group’s industry-leading loans growth of 15% met with net interest margin expansion (2.15%, +8bps) from the OPR upcycle. However, non-interest income (-14%) was dragged by overall softness in fees in addition to poorer treasury results. Cost-income ratio stayed lofty at 64.1% (+2.4 ppts) as expenses generally rose from greater business activities. Provision-wise, annualised credit cost increased to 51bps (+6bps) as the group made sizeable top ups to provisions to secure a loan loss coverage of above 100%. All in, owing to higher effective tax rate during the year, FY22 net profit for continuing operations came in at RM199.8m (-54%). In consideration of AHAM’s discontinued operations, earnings would otherwise come in at RM1.30b (+147%).

Briefing highlights. Ending its first quarter post-AHAM disposal, the group opines that its core banking business is firmly positioned to capture market share. Against its peers, AFFIN expects its double-digit loans growth to sustain, thanks to more aggressive channels which were previously inactive, focusing on mortgages and hire purchases. The group also believes that its upcoming mobile app would drive CASA acquisition strongly, hoping to see interest margin expanding as opposed to peers whom are anticipating erosion. With regards to cost, the group believes further investments will be needed to fuel its A25 targets but anticipates cost-income ratio to fall as top line improves. In addition, the group believes its asset quality measures are well under control, guiding for a decline in credit cost even without the consideration of provisional writebacks.

Forecasts. Post results, we cut our FY23F earnings by 10%. For the moment, we are conservative against the group’s 7% ROE target for FY23 as its accelerated loans base growth could still be undermined by market-wide pricing pressure. Furthermore, we hesitate to account for a full write-back of the group’s existing RM440m management overlay as asset quality concerns may still persist. That said, given its fairly low base, our newly introduced FY24F numbers demonstrates a decent earnings growth of 10% should customer acquisition strategies prevail.

Maintain OUTPERFORM and TP of RM2.25. Although we roll over our valuation base year to FY24F BVPS of RM5.34, we seek to tone down our GGM inputs, namely ROE (6.5% from 7.0%) given the group’s ex AHAM structure still warrants further earnings confidence, arriving at a new applied PBV of 0.42x (from 0.48x). That said, at current price points, AFFIN could offer investors fairly modest dividend yields of 5%-6%. In addition, the group’s new core banking strategies could be viewed with high growth potential as opposed to its more matured peers, possibly leading to future earnings surprises. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 28 Feb 2023