• Maintain SELL and MYR1.65 TP, 35% downside. Affin’s 1Q24 results met our, but missed Street estimates, while falling short of management’s target for the full-year. The group sees a rebound in income from its NIM rebuilding efforts, whereas opex should gradually decline as technology investments subside. Regardless, we think Affin is overvalued at the current price, especially given its soft earnings generation.

• Results review. 1Q24 net profit of MYR110.2m (-26% YoY, +>100% QoQ) came in line with our, but missed Street estimates. YoY, weaker NII (-7%) from a 32bps NIM compression was offset by the much stronger non-II (+34%), leading to operating income growth of 2%. Opex increased 15% YoY, mostly attributable to higher personnel costs following the collective agreement adjustments made beginning 3Q23. QoQ, weaker non-II (-10%) from lower forex gains was offset by stronger NII (+10% from loans growth and stable NIM) and lower opex (-5% from seasonality). 1Q24 also saw the group record a net writeback in credit costs amounting to MYR23m, attributable to the corporate segment. All in, 1Q24 ROE of 4.0% (1Q23: 5.5%) fell below management’s target of 7% for the year.

• Eyeing growth from higher-yielding segments. Loans growth stood at 11% YoY (QoQ: +2%) in 1Q24, with community banking (personal loans, credit cards) being the key driver – we expect this trend to continue, as the focus on higher-yielding retail loans forms a key part of management’s NIM strategy. Elsewhere, credit demand from SMEs has been strong, but management is watchful of potential asset quality weakness in that segment. Corporate loans, on the other hand, could surprise on the upside, as the existing pipeline looks healthy.

• GIL uptick under control. Affin’s GIL added 5% QoQ (YoY: +11%), with two enterprise banking accounts (from the wholesale & retail trade and restaurants sectors) slipping into impaired status during the quarter. Management remains confident of its asset quality, as the entire enterprise banking portfolio is fully provisioned for. Elsewhere, household GILs were also on the rise (HH GIL ratio: +12bps QoQ) but this is likely due to seasonality effects, and should decline moving forward.

• Guidance unchanged. FY24F targets of 8% loans growth, 1.6% NIM, 64% CIR and 7% ROE were left unchanged. We think there is upside potential to the loans growth target, while NIM should benefit from a potential influx of CASA accounts from the imminent onboarding of the Sarawak State as a substantial shareholder. The other two targets, however, do look rather ambitious in our view.

• Forecasts and TP unchanged. Following the release of the group’s 2023 Annual Report, our 2.9 ESG score for Affin is also maintained. As such, we retain our 2% ESG discount to our TP.

Source: RHB Research - 23 May 2024