• Still SELL, new MYR1.60 TP from MYR1.65, 50% downside with c.3% FY25F yield. Affin’s 1H24 results benefitted from a net writeback in impairment allowances, as PIOP missed estimates following the resumption of NIM compression. We make no change to our SELL call, as we deem the stock’s current valuation to be unjustified against its weak earnings generation. However, the Sarawak State Government’s impending purchase of a further 15-25% stake in Affin could keep valuations elevated in the near-term.

• Results review. Affin’s 2Q24 net profit of MYR118.6m (+8% QoQ, +5% YoY) brought the 1H total to MYR228.8m (-12% YoY) – broadly meeting our and Street estimates. The YoY drop was largely a result of lower NII (-3% YoY) and greater opex (+16% YoY). PIOP was down 28% YoY and missed our estimates, but mitigated by a net writeback of provisions amounting to MYR34m (1H23: net charge of MYR37m) – thanks to corporate loan settlements and recoveries. For the quarter, NII dropped by 2% QoQ (YoY: +2%) after a 4bps NIM compression (YoY: +7bps). However, a second consecutive quarter of net impairment writebacks (2Q24 net writeback: MYR11m vs 2Q23 net charge: MYR51m) ensured positive net profit growth.

• What is in store for NIM? Management attributed the 4bps QoQ NIM compression to a shift in its growth strategy – it is currently observing some stress in the SME space, and is willing to sacrifice margins to obtain higher quality customers. We note two factors that could provide some cushion to the number: i) The group is looking at alternative funding sources (eg borrowings) that are cheaper than deposits; and ii) it has been proactively cutting deposit rates. However, the shift in focus could mean NIM will remain subdued in the near term.

• Asset quality – pockets of vulnerability, but stable overall. Aside from certain pockets in SME, mortgage and personal financing, the overall picture on asset quality appears stable. The group is comfortable with its LLC of 97% (1Q24: 100%, 2Q23: 128%), while further writebacks of provisions could be possible if the macroeconomic landscape remains positive.

• Sarawak – non-II benefits, NII more mixed. We understand that the Sarawak State Government has obtained approval to acquire a further 15-25% stake in Affin, and is ironing out the fine print of the agreement. With economic activity expected to ramp up in the state, we think Affin’s clear-cut benefit lies in the fee income space (eg investment banking deals, loans-related fees). On the other hand, the state’s NII potential for Affin looks rather mixed – cost of funds could benefit from an influx of Sarawak CASA (c.MYR3bn or +c.16% per our channel checks), although loan growth in the state should still be subject to the abovementioned NIM and asset quality challenges.

• We lower FY24-26F earnings by 6%, 5% and 4% as we factor in narrower NIM assumptions, partly offset by lower credit costs in FY24F. Our TP drops to MYR1.60, as a result, and includes a 2% ESG discount.

Source: RHB Research - 26 Aug 2024