• Upgrade to BUY from Trading Buy, with new GGM-derived MYR2.80 TP from MYR2.45, 15% upside and c.6% FY23F yield. Affin’s 9M22 results met expectations, with higher-than-expected pre-emptive provisions demonstrating management’s commitment to preserving asset quality. While the share price has risen c.41% YTD, rapidly-improving asset quality and the inclusion of Affin into the MSCI Global Small Cap Index – effective 1 Dec 2022 – offers further upside opportunities, in our view.

• Results review. 9M22 net earnings of MYR1.16bn (tripled YoY) met our, but came ahead of consensus estimates. 3Q22 NII of MYR457m was up a healthy 8% QoQ (YoY: +25%) on an expanding loan book and flat deposits. Overheads increased 19% QoQ (YoY: +13%) due to increased IT investments with CIR elevated at 69%. As expected, 3Q22 credit costs shot up to 166bps (2Q22: 26bps, 3Q21: 40bps) as the company booked in additional overlays of MYR220m to push LLC to >100%.

• Loans growth solid while deposits stayed flat. Gross loans added a further 3% QoQ in 3Q22 (YoY: +17%), bringing YTD loans growth to 11% (FY22 target: 12%). On the other hand, deposits remained flattish QoQ (YoY: +11%), with CASA deposits shedding 1% (YoY: +13%). However, interest expenses increased 21% QoQ (YoY: +43%) as competition for deposits remains heated. As a result, NIM grew a small 2bps QoQ to 2.01% (3Q21: 1.95%).

• Substantial improvement in asset quality. As mentioned, management added MYR220m in additional overlays (funded by the Affin Hwang Asset Management Bhd (AHAM) divestment gains) during the quarter, pushing LLC to 109%, against an earlier guidance of 100%. The overlay balance at end-September stood at c.MYR498m, and formed 42% of total provisions. Despite this, GILs actually declined 14% QoQ (YoY: -29%), against the industry QoQ increase of 3% (YoY: +12%). The GIL ratio improved to 1.9% from 2.3% in 2Q22 (3Q21: 3.1%) as a result. Management has committed to keeping the GIL ratio below 2%.

• We lower FY22F by 5% as we factor in higher credit costs, but lift FY23F- FY24 earnings by 1% as we pencil in better loans growth. Our GGM-derived TP rises to MYR2.80 (from MYR2.45), after revising our cost of equity and sustainable ROE assumptions, and includes a 2% ESG premium. Valuation of 0.47x for the stock is currently the lowest among Malaysian banks under our coverage, and against an ROE of 6% for FY23F, appears undemanding. Upgrade to BUY with improving asset quality and inclusion into the MSCI Global Small Cap Index as key investment merits.

• Key downside risks include weaker-than-expected loans growth, muted NIM prospects from a low CASA mix, as well as greater-than-expected credit and operating costs. The converse represents upside risks.

Source: RHB Research - 29 Nov 2022