• Downgrade to SELL from Neutral, unchanged MYR1.90 TP, 25% downside. Affin’s 4Q23 results – to be released on 26 Feb 2024 tentatively – are likely to be soft QoQ due to continued pressure on NIM. On the bright side, asset quality looks stable, with management’s credit cost and GIL targets likely to be bettered. We downgrade Affin to a SELL as valuations look lofty now, whereas earnings support from Sarawak might not be so immediate.

• Another soft quarter awaits? We expect Affin to book a net profit of c.MYR95m (-6% QoQ, >+100% YoY) in 4Q23 (Bloomberg consensus: MYR113.9m). We think 4Q NII prospects are tilted towards the downside, given NIM pressure from deposit competition and lower asset yields. Opex and credit costs, however, could turn out lower than expected. On the whole, however, our 4.2% ROE forecast for FY23F (consensus: 4.3%) falls short of management’s 4.5% target. We expect the bank to announce a DPS of 10 sen, reflecting a 50% dividend payout ratio.

• Positives. From a chat with management, we gathered that loan growth will likely meet its 12% YoY target, with retail banking as the core driver. Opex could also be lower than expected in 4Q23, while CIR is likely to miss the <65% target (9M23: 68%) due to weaker-than-expected income growth. On the other hand, we understand that credit costs were also well maintained, and could come in below the <30bps (gross) guidance (9M23: 18bps).

• Negatives. Management’s full-year NIM guidance of 1.45%-1.50% implies an estimated 23-43bps increase from the 3Q23 level of 1.24%, which looks optimistic in our view. Seasonal year-end deposit competition and lower loan rates offer downside risk to NIM. However, the impact to NII will likely be cushioned by the aforementioned above-industry loan growth.

• Sarawak – what is in it for Affin? Sarawak’s increasing interest in Affin puts the bank at the forefront of the state’s economic development initiatives. Loans, CASA deposits and investment banking deals are all opportunities that could arise from Affin having a greater presence in Sarawak, although most of the positives will take time to materialise, while risks could come in the form of higher-for-longer CIR and potential pressure on margins and asset quality. In Figure 1, we present a SWOT analysis on Affin and its expansion in the state.

• Valuation looks lofty. After a recent share price rally, Affin’s P/BV valuation of 0.5x looks lofty – especially when compared to its soft forecast ROE of 4- 5%. While the Sarawak theme offers a unique growth story for the bank, we will wait until further clarity emerges on its growth strategies in the state, the required capital/operating/credit costs, and how this translates into a meaningful and sustainable ROE uplift (to 7-8%, for example), before turning a corner on the stock.

Source: RHB Research - 20 Feb 2024