Review

• Affin Bank reported a weaker set of 1HFY24 results, with profit after tax declining by 12.7% YoY to RM228.mn from RM262.2mn in 1HFY23. The weaker YoY performance was attributed to lower net interest income (NII), along with higher overhead expenses and allowances. ROE declined to 4.09% vs 4.81% a year ago.

• YoY, Affin's reported net income was steady at around RM999.3mn. Net interest income (NII) declined by 11.5% YoY but was offset by increases in the contributions from Islamic Banking operations (+9.9% YoY) and non-interest income (non-NII) (+7.8% YoY). NII continued to be supported by a loan expansion, which rose by around 10.5% YoY to RM69.0bn. However, the cost of funds also expanded by another 3 bps QoQ and 5 bps YoY due to pressure from competition. Net Interest Margin (NIM) slipped 4 bps QoQ to 1.40%.

• The healthy loan growth momentum was underpinned by increases in Community Banking (+13.6% YoY), Corporate Banking (+5.6% YoY) and Enterprise Banking (+4.2% YoY). Elsewhere, total deposits contracted by 0.7% QoQ and 0.4% YoY. Fixed Deposits, NIDs, MMD & CMD fell by 3.9% YoY (-2.1% QoQ), while total CASA grew by 11.1% YoY (+3.3% QoQ). The CASA ratio stood at 25.9% in 2Q24 vs. 26.7% in 2023, below the target of 30% by the end of 2024. The increase in CASA was led by Enterprise Banking (+14.3% YoY), followed by Community Banking (+11.7% YoY) and Corporate Banking (+5.5% YoY).

• Non-interest income rose to RM284.2mn vs RM263.6mn in 1HFY23, thanks to stronger net gains from financial instruments amounting to RM90.9mn (1HFY23: RM52.5mn). Net fee and commission income also grew at an encouraging 10.1% YoY. The YoY improvement in fee income was led by Stockbroking (+47.7% YoY) and Advisory Fees (+80.0% YoY). Meanwhile, Fees & Commissions and Wealth income declined by 1.7% and 3.4% YoY, respectively.

• Operating expenses climbed 8.1% YoY (-2.9% QoQ). Yearly, Personnel costs expanded by 14.4% YoY (+6.6% QoQ). Meanwhile, Promotion and Marketing-Related Expenses accelerated by 40.7% YoY (-31.9% QoQ), followed by Establishment Expenses (+27.3% YoY, -14.0% QoQ). However, the General and Administrative Expenses declined by 9.2% YoY (-14.2% QoQ). On the back of negative JAWs, the cost-to-income ratio deteriorated to 74.7% in 1HFY24 vs. 64.7% in 1HFY23.

• Affin reported a net allowance of RM30.7mn vs a writeback of RM36.5mn in 1HFY23. Management noted an 8 bps uptick in the gross impaired loans ratio (GIL) for the Community Banking portfolio to 1.03% due to increases in mortgage loans and personal financing GIL. Meanwhile, the GIL ratio for Corporate and Enterprise Banking improved by 8 bps and 81 bps QoQ. As a result, the overall GIL ratio strengthened sequentially to 1.89% from 1.96% in 1QFY24. The loan loss coverage eased QoQ and YoY to 100.06% due to elevated levels of impairment.

• Elsewhere, the group's CET1 and Total Capital Ratio stood at 12.8% and 16.6%, respectively.

Impact

• No change to our earnings estimates.

Outlook

• Management is currently reviewing its 2024 targets and may adjust them downward from the initial guidance of RM1.0bn in PBT and a 7% ROE. To recap, some of the other targets include 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%.

• Despite ongoing challenges, management remains committed to optimising the operational cost structure and cost of funds. Strategic initiatives, such as adjusting the deposit mix, leveraging the mobile banking app for cross-selling and enhancing client engagement, and prioritising the execution of its robust investment banking pipeline, are gradually contributing to improved results, as evidenced in 1H. However, management has noted that NIM could compress in the short term as the focus shifts to higher credit-quality clients.

• Additionally, efforts are being made to revitalise the corporate loan portfolio, particularly in exploring growth opportunities in the Sarawak region. Management anticipates significant potential in this area, with access to a large customer and deposit base. Moreover, management anticipates opportunities for growth in expanding the Environmental, Social, and Governance (ESG) financing initiatives, which are targeted to make up 10% of the total portfolio by end 2024.

Valuation

• We updated the beta and lowered our market risk premium from 6% to 5.5% for the banking sector on the back of the improving economic environment in Malaysia, the banking system’s healthy asset quality and capital ratios, stable interest rate environment and more positive investor sentiments. With that, we raise Affin TP from RM2.50 to RM2.95. Our valuation is based on an implied PBV of c. 0.66x based on the Gordon Growth Model. However, given that Affin’s share has risen steeply and ahead of its fundamentals, we maintain our SELL recommendation on the stock.

Source: TA Research - 26 Aug 2024