Review

• Coming off a stronger 2Q, Affin Bank posted weaker 3QFY19 results. Net profit plunged 53.6% QoQ to RM72.4mn from RM156.0mn in 2QFY19, underpinned by a combination of lower operating income, higher overhead expenses and increase in allowances. Nevertheless, coming in within expectations, YTD net profit of RM384.4mn accounted for 73% and 72% of ours and consensus full year forecast.

• Net interest income (NII) registered declines of 14.6% YoY and 3.4% QoQ. 9MFY19 NII slipped 12.8% YoY while income from the Islamic Banking Business also fell by some 0.1% YoY. YoY NII decreased on the back of softer loan growth (-5.3% YoY) and contraction in the net interest margin (NIM), which narrowed to 1.65% in 9MFY19 from 1.83% in FY18 due to higher funding cost. By segment, residential mortgages and credit cards rose 13.6% and 28.3% YoY. Meanwhile, business and corporate loan fell by around 11% YoY, as SME loans also contracted by some 32% YoY.

• Meanwhile, 9MFY19 non-interest income (non-NII) expanded by 11.3% YoY. This was on this back of higher gain on sale of financial investments at FVOCI in 9M2019. Fee income however, fell by 8% YoY, dampened by lower brokerage income, management fees, processing and early settlement fees as well as placement fees.

• On a QoQ basis, total impairment surged to RM43.1mn due to additional allowances made for an existing troubled account. However, cushioned by net writebacks in allowance for credit impairment losses of RM36.1mn recorded in the 1H, impairment losses in 9MFY19 were much muted as Affin registered higher impairment losses in 9MFY18. Gross credit cost improved to around 8 bps in 9MFY19 vs. 15 bps in FY18. Meanwhile, the formation of newly impaired loans expanded by some RM5.1mn YTD. This translates to gross impaired loans ratio (GIL) of 3.42% in 9MFY19 (vs. FY18: 3.25%).

• Elsewhere, the CET1 and Total Capital Ratio for the group stood at 13.7% and 22.4%.

Impact

• No change to our earnings estimates.

Outlook

• Strains from a challenging macro environment continues to be reflected in Affin’s results as loan growth and fee income remains lacklustre. Going forward, we remain positive on the rollout of Affin’s new digital banking channels for the retail and business segments, which we believe could create new revenue streams, help spur topline growths and improve customer retention. However, amid the weak macro environment, mounting asset quality risks and intense competition among other industry players, we foresee less robust prospects for stronger earnings in FY19 and FY20.

Valuation

• Tweaking the risk free rate assumption to 3.6% from 4.0% in our Gordon Growth model, we derive a new implied PBV of 0.53x. With that, we adjust Affin’s TP to RM2.30 from RM2.20. BUY reiterated on Affin.

Source: TA Research - 29 Nov 2019