AFFIN’s 1QFY24 results were within expectations with signs of weakness to be compensated in upcoming quarters. We noted that while the group maintained its growth targets in lieu of this, it does not account for benefits from Sarawak as the timing of its spillover remains an uncertainty. We keep our forecasts relatively unchanged. Maintain UNDERPERFORM for presently rich valuation amidst low ROEs with a GGM-derived TP of RM1.80.

Within expectations. AFFIN’s 1QFY24 net earnings of RM110.2m came in as expected, making up 22% of our full-year forecast and 23% of consensus full-year estimate. No dividend was declared this quarter as the group typically makes a single dividend payment during its 4Q period.

YoY, 1QFY24 net interest income fell by 7% as NIMs continued to exhibit stress (1.44%, -35 bps) from stretched funding cost in spite of an 11% loans growth. Meanwhile, non-interest income grew by 34% thanks to better treasury performances. Cost-to-income ratio spiked to 75.1% (+8.3 ppts) mainly due higher spending on establishments while personnel cost was also strained following union wage reviews. Meanwhile, provisions were reported in a net writeback position but mitigated by lower profits shared by associates. All in, 1QFY24 net profit came in at RM110.2m (- 26%).

QoQ, 1QFY24 saw NIMs picking up (1.44%, +10 bps) on better priced asset yields to offset sustained funding costs while low forex gains led to total income to only increase by 4%. With comparatively lower personnel cost and writebacks seen during the quarter, net earnings of RM110.2m reflected a 179% improvement.

Briefing highlights. While AFFIN appeared to have a slow start to the year, the group stayed confident in catching up in subsequent quarters amidst several broad challenges.

1. The 8% loans growth target was maintained despite the group reporting an 11% increase so far. Its cautiousness stemmed from a potentially slowing corporate loans (26% of total book) scene. Meanwhile, community banking looks to be afloat thanks to mortgages (30%) and hire purchases (22%) still being much in demand.

2. NIMs target of 1.6% looks to be achieved with several headways invested into building its CASA portfolio (1QFY24: 25%, FY24 target: 30%) which could improve in line with larger business on the community banking front.

3. PBT target of RM1.0b for FY24 is intact, with the group anticipating sustained growth across its key pillars without accounting for any potential spillover from Sarawak State Government’s entry as a minority shareholder. The group opines that aside from a higher CASA-mix, fee income are likely to be bolstered by mandate wins on its investment banking arm and extraction of better efficiency from its workforce.

4. The group believes it is poised to be strong beneficiary of Sarawak’s economic growth trajectory, with the latter’s 2030 GDP target of RM282b (CY22: RM140b). While prior guidance of initial entry was to expand on its branch network into the teens, the group views opportunities could be more corporate-centric with the further development of several key industries there such as healthcare, oil & gas, energy and aviation.

Forecasts. Post results, we tweak our FY24F/FY25F earnings by -1% from model updates.

Maintain UNDERPERFORM and TP of RM1.80 based on an unchanged GGM inputs and PBV of 0.35x (COE: 11.5%, TG: 3.0%, ROE: 6.0%). AFFIN’s share price saw strong appreciation with the inclusion of Sarawak State Government amongst its shareholders, spurring hopes of substantial spillovers from there. We believe it could be overbought with our abovementioned discussions indicating that immediate benefits need to be more meaningful. Paired by the group’s below-industry ROE, we view risk-reward to be unfavourably skewed. 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 expansion, (ii) higher-than-expected loans growth, (iii) better-than-expected asset quality, (iv) surge in capital market activities, (v) favourable currency fluctuations, and (vi) changes to OPR. 

Source: Kenanga Research - 23 May 2024