Affin Bank’s 1H23 profit after tax declined by 15.5% YoY to RM262.2mn from RM310.3mn a year ago due to lower net income. QoQ net profit also fell by 24.0%. Excluding contributions from AHAM, Affin’s BAU PBT would have risen by 1.8% YoY. ROE stood at 4.87% vs. 5.80% a year ago.
The net income declined by 9.8% YoY as the 1H23 net interest income (NII) and contributions from Islamic Banking operations contracted by 10.6% and 4.4% YoY. While NII continued to be supported by a loan expansion, which rose by around 12.7% YoY to RM61.5bn, the net interest margin (NIM) sank 19 bps QoQ and 42 bps YoY to 1.57%. The contraction in NIM was due to the steep increase in the cost of funds (+101 bps QoQ, +131 bps YoY) which was attributed to intense competition as well as the issue of the 2nd series of a 10-year Additional Tier 1 Capital Securities (AT1CS) amounting to RM500mn at a fixed rate of 5.70%.
The higher loan growth was underpinned by increases in Community Banking (+20.6% YoY) and Enterprise Banking (+12.5% YoY). Elsewhere, total deposits expanded by 8.6% QoQ and 11.0% YoY. Fixed Deposits, NIDs, MMD & CMD rose at a softer pace of 8.5% YoY (+7.3% QoQ) compared to CASA (+19.8% YoY, +12.9% QoQ). The CASA ratio stood at 23.2% in 2Q23 vs. 21.5% a year ago. The increase in CASA was driven by Enterprise Banking (+28.8% YoY) and Corporate Banking (+25.0% YoY).
Other operating income remained a drag on earnings, dampened by declines in fee and commission income (-54.1% YoY). Meanwhile, net gains from financial instruments more than doubled YoY to RM52.5mn from RM20mn a year ago.
1H23 operating expenses decreased by 4.1% QoQ and 6.4% YoY. Yearly, Promotion and Marketing-Related Expenses declined by 25.6% YoY (+6.1% QoQ), followed by Establishment Related Expenses (-11.5% YoY, -1.7% YoY) and Personnel Costs (-8.3% YoY, -3.2% QoQ), muting the increase in General and Administrative Expenses (+32.5% YoY, -12.5% QoQ). Management noted that the softer fee-based income and NIM raised the cost-to-income ratio to 64.7% in 2Q23 vs. 62.3% in 2Q22.
Affin reported allowances for impairment losses of RM36.5mn in 1H23 vs. an allowance of RM38.0mn in 1H22. The net credit cost stood at 4 bps in 1H23 due to recoveries amounting to RM73.7mn. The loan loss coverage ratio steadily expanded to 131.8% from 80.0% a year ago, while the gross impaired loans ratio (GIL) also strengthened to 1.78% (2Q22: 2.28%).
Elsewhere, the group's CET1 and Total Capital Ratio stood at 14.7% and 19.4%.
Impact
We tweaked our NIM as well as lowered our growth assumptions for operating expenses to align with the 1H results performance. With that, we lower Affin’s FY23/24/25 net profit to RM515/551/596mn RM552/574/605mn.
Outlook
Management noted that the group’s total asset has surpassed RM100bn, on track with its A25 transformation plan. In terms of income, Affin will be looking to fill the gap from the sale of AHAM and scale up in the highmargin businesses and fee-based income such as FX, Bancassurance, Wealth Management and Trade. The upcoming launch of a new Mobile App, postponed to September 2023, is expected to be pivotal in building its CASA franchise and strengthening its customer base.
However, management foresees further tapering of loan growth to mitigate potential risks associated with the ongoing macro challenges. Elsewhere, the focus will also be intensified towards monitoring asset quality and ensuring sufficient buffers over its loan/financing exposures.
Post the 1H23 results, Affin is now guiding for a softer ROE of 5.8% (vs. 7%) for FY23 (FY22: 5.6%), underpinned by loan growth of 12%, softer NIM of 1.86% (vs. 2.11%), gross credit costs of around 30 bps, and a costto-income ratio of 60% (vs 57.5%).
Valuation
We lowered the sector’s market risk premium assumption to 6.0% from 6.5% on the back of an improved domestic political climate. As such, despite the slight downward revision to our forecast, we raised Affin’s TP to RM2.05 from RM1.90. Our valuation is based on an implied PBV of c. 0.45x based on the Gordon Growth Model. Hold reiterated on Affin.
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