AFFIN’s 1HFY23 net profit (+3%) was within expectations. Challenges arising from cumulative interest rate pressures and slowing economic prospects are likely to undermine asset quality in the near-term. Nevertheless, the group is confident of containing such concerns with an upcoming mobile app looking to relieve funding cost from better CASA acquisition. Maintain OP and GGM derived PBV TP of RM2.10.

1HFY23 within expectations. AFFIN’s 1HFY23 reported net profit of RM262.2m made up 48% of our full-year forecast and 51% of consensus full-year estimates. No dividend was declared as the group typically announces during its 3QFY23 earnings report.

YoY, 1HFY23’s net interest income declined by 8% due to NIMs being compressed (1.63%, -43bps) from persistent deposits competition. That said, the group’s 13% loans growth was fuelled by greater mortgage and hire purchase share. Meanwhile, non-interest income (+75%) gained from strong return in treasury performances. The period saw cost-income ratio rising to 64.7% (+1.2ppt) on the back of increasing personnel and administrative expenses. Provision-wise, annualised credit cost improved to 12bps (-8bps) but mostly due to write-backs seen in 1QFY23. However, 2QFY23 reported lumpier bookings at 33bps following the delinquencies from newly troubled accounts attributed by tougher macro conditions. All in, 1HFY23 net profit from continuing operations of RM262.2m (+3%) was posted. Including discontinued operations from AHAM, earnings would report a 10% decline instead.

Briefing highlights. The group hinted of rising asset quality concerns on certain fronts. It guided for a narrower FY23 PBT (RM850m, from RM1.0b) attributable to pressured NIMs but also revised various targets downwards.

1. In 2QFY23, the group observed the emergence of newly troubled accounts, particularly from community banking which had not received repayment assistance previously. Additionally, defaults from working capital loans were led by a single large enterprise account. The group attributed this to the cumulative pressures from past OPR hikes in addition to slowing prospects in certain sectors. That said, the group sought to maintain its 30bps credit cost guidance. This is despite higher prospective provisioning in 3QFY23 but we reckon seasonal factors from past Hari Raya festivities may have distorted asset quality readings and projections. We had modelled 32bps/34bps credit cost into our FY23F/FY24F numbers.

2. Despite the abovementioned, the group opines that its 12% loans growth target could still be achieved. Challenges may be fronted by real estate and manufacturing sectors with slowing mortgage books. We reckon construction, hire purchase and personal loans may continue to pick up, but we input a slower growth of 10%.

3. The straining of NIMs could have bottomed in 2QFY23 as the group reported its sequential drop to 1.51% (-28 bps) from a surge in funding cost no thanks to new bond issuances. That said, CASA levels may rise further with the group keeping hopes on stronger acquisition with the launch of its mobile banking app in Sep 2023.

4. Sarawak will remain in the group’s focus following the recent c.5% stake acquisition from its state government. Although its penetration strategies may not be fully available, it may lead to higher operating expenses in the 2HFY23 period.

Forecasts. Post results, we trim our FY23F/FY24F earnings by 3%/2% from model updates.

Maintain OUTPERFORM and TP of RM2.10. Our GGM-derived PBV of 0.39x (COE: 12.0%, TG: 3.0%, ROE: 6.5%) remains unchanged against FY24F BVPS of RM5.35. The group continues to make strides to expand its core banking strategies. Despite a comparably smaller book size relative to its large cap peers, AFFIN could be seen as a high growth play with its loans acquisition rate being double of industry averages. 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 Aug 2023