Review

• Affin Bank reported a weaker set of results with 1QFY24 profit after tax declining by 26% YoY to RM110.1mn from RM148.9mn in 1QFY23. The weaker YoY performance was attributed to lower net interest income (NII) and higher overhead expenses. ROE declined to 3.9% vs 5.49% a year ago.

• YoY, Affin’s reported net income broadened by 2.1% as the decline in net interest income (NII) (-17.1% YoY) was offset by increases in the contributions from Islamic Banking operations (+9.2% YoY) and noninterest income (non-NII) (+33.7% YoY). While NII continued to be supported by a loan expansion, which rose by around 11.2% YoY to RM68.0bn, the net interest margin (NIM) slipped by 32 bps YoY. QoQ, NIM was steady at 1.44%, as the slight 2 bps rise in the cost of funds was cushioned by a 3 bps increase in loan yield.

• The healthy loan growth momentum was underpinned by increases in Community Banking (+15.0% YoY), Enterprise Banking (+6.2% YoY) and Corporate Banking (+4.7% YoY). Elsewhere, total deposits expanded by 8.9% YoY. Fixed Deposits, NIDs, MMD & CMD rose at a faster pace of 5.3% YoY (+3.8% QoQ), while CASA grew by 21.5% YoY (-5.6% QoQ). The CASA ratio stood at 29.3% in 1Q24 vs. 33% in FY23. The increase in CASA was led by Community Banking (+37.7% YoY) and Enterprise Banking (+21.2% YoY), although the CASA accumulated by Corporate Banking declined by -2.2% YoY.

• Non-interest income ballooned to RM142.5mn vs RM106.6mn in 1QFY23, thanks to stronger net gains from financial instruments amounting to RM52.0mn (1QFY23: RM15.5mn). Net fee and commission income turned around to grow by 22.5% YoY. Encouragingly, fee income continued to show sequential improvements, led by Advisory Fees (+431% QoQ), Stockbroking (+29.8% YoY) and Fees & Commissions (+9.8% QoQ). Wealth income, however, declined by 43.8% QoQ.

• Operating expenses jumped 14.8% YoY (-5.4% QoQ). Yearly, Personnel costs expanded by 9.0% YoY (-13.3% QoQ). Meanwhile, Establishment Expenses accelerated by 35.8% YoY (+3.4% QoQ), followed by Promotion and Marketing-Related Expenses (+61.8% YoY, +24.2% QoQ). The General and Administrative Expenses however, declined by 8.2% YoY (+16.7% QoQ). On the back of negative JAWs, the cost-to-income ratio deteriorated to 75.1% in 1QFY24 vs. 66.8% in 1QFY23.

• Affin reported a net impairment writeback of RM18.4mn during the quarter, vs a writeback of RM13.3mn. Management noted some uptick in the gross impaired loans ratio (GIL) for the Enterprise and Community Banking portfolio. As a result, the overall GIL ratio deteriorated sequentially to 1.96% from 1.90% in 4QFY23, while the loan loss coverage eased to 102.3% from 116.9% due to elevated levels of impairment.

• Elsewhere, the group's CET1 and Total Capital Ratio stood at 13.4% and 17.6%, respectively.

Impact

• No change to our earnings estimates.

Outlook

• Based on Affin’s 1QFY24 performance, achieving targets such as a PBT of RM1bn and ROE of 7% seems overly ambitious at this stage, in our opinion. In 1QFY24, NIM and CTI ratios also did not meet management's expectations. However, despite these challenges, management is determined to maintain their targets for 2024. They plan to achieve this through strategic initiatives such as adjusting the deposit mix to increase CASA deposits and pursuing higher-margin business to counter NIM compression, as well as leveraging the mobile banking app for cross-selling and enhancing client engagement, and prioritising the execution of its robust IB pipeline. Additionally, efforts are underway to revitalise the corporate loan portfolio, with a particular focus on potential growth opportunities in the Sarawak region and expanding Environmental, Social, and Governance (ESG) financing initiatives.

• To recap, management is targeting to achieve a PBT of RM1.0bn and an ROE of 7%, underpinned by a loan growth target of 8%, better cost efficiency measures to bring the CTI ratio down to 64% and enhanced credit writing standards to manage the gross credit cost to between 20- 30 bps, keeping the GIL ratio to 1.9% and loan loss coverage to around 100-120%.

Valuation

• Rolling valuations forward to FY25, we raised Affin’s TP to RM2.50 from RM2.25. Our valuation is based on an implied PBV of c. 0.56x based on the Gordon Growth Model. Given that Affin’s share has risen steeply and ahead of its fundamentals, we maintain our SELL recommendation on the stock.

Source: TA Research - 23 May 2024