Review

• Affin Bank reported a stronger set of 9MFY24 results, with profit after tax rising by 3.3% YoY to RM374.6mn from RM362.7mn in 9MFY23. While total income came within expectations, the better YoY performance was attributed to a net writeback in allowances YTD. ROE broadened to 4.37% from 4.09% in the previous quarter.

• YoY, Affin's 9M net income grew 7.5% YoY to RM1,612.1mn. While the net interest income (NII) declined by 0.8% YoY, the overall impact on net income was cushioned by increases in the contributions from Islamic Banking operations (+12.1% YoY) and non-interest income (non-NII) (+14.2% YoY). NII continued to be supported by a loan expansion, which rose by around 9.9% YoY to RM70.6bn. However, the Net Interest Margin (NIM) slipped 9 bps YTD to 1.33%, underpinned by higher cost of funds (+8 bps YTD), while the loan yield expanded by 5 bps.

• The healthy loan growth momentum was underpinned by increases in Community Banking (+12.0% YoY), Corporate Banking (+6.5% YoY) and Enterprise Banking (+4.7% YoY). Elsewhere, total deposits strengthened during the quarter with a 3.9% QoQ and a 3.3% YoY increase. Fixed Deposits, NIDs, MMD & CMD fell by 1.6% YoY (+2.5% QoQ), while total CASA grew by 19.4% YoY (+7.7% QoQ). The CASA ratio climbed to 26.86% in 3Q24 vs. 26.7% in 2023, but still slightly below the target of 30% by the end of 2024. The increase in CASA was led by Enterprise Banking (+16.7% YoY) and Corporate Banking (+59.6% YoY).

• Non-interest income (non-NII) rose 14.2% YoY to RM513.3mn vs RM449.6mn in 9MFY23, thanks to net fee and commission income, which grew at an encouraging 16.5% YoY. The YoY improvement in fee income was led by Stockbroking (+60.8% YoY), Advisory Fees (+29.0% YoY) and Fees & Commission (+3.1% YoY). Meanwhile, Wealth income declined by 4.3% YoY. Other non-NII saw softer net gains from financial instruments (-6.2% YoY), but forex and other income rose by 32.7% YoY.

• Operating expenses climbed 17.8% YoY (+24.0% QoQ). Yearly, Personnel costs expanded by 16.9% YoY (+20.3% QoQ). Meanwhile, Promotion and Marketing-Related Expenses accelerated by 28.9% YoY (- 3.2% QoQ), followed by Establishment Expenses (+26.4% YoY, +35.9% QoQ) and General and Administrative Expenses (+0.4% YoY, +28.4% QoQ). On the back of negative JAWs, the cost-to-income ratio deteriorated to 74.6% in 9MFY24 vs. 68.1% in 9MFY23.

• Affin reported a net writeback in allowances amounting to RM69.5mn vs a net allowance of RM63.9mn in 9MFY23. Management noted a 19 bps uptick in the gross impaired loans ratio (GIL) for the Community Banking portfolio to 1.02% due to increases in mortgage loans. Meanwhile, the GIL ratio for Corporate and Enterprise Banking improved by 70 bps and 19 bps YTD. As a result, the overall GIL ratio strengthened to 1.74% from 1.90% in FY23. The loan loss coverage stood at 101.2%.

• Elsewhere, the group's CET1 and Total Capital Ratio stood at 13.2% and

17.2%, Respectively.

Impact

• We reduced our credit cost assumptions to 16/16/17 bps from 19/19/20 bps for FY24/25/26e to align with the 9M results performance. The revised credit cost assumption also aligns with management’s revised target of 10-15 bps (lowered from 20-30 bps) for FY24. With that, the FY24/25/26 earnings forecast is adjusted to RM477.5/548.9639.2mn from RM462.4/536.9/628.7mn respectively.

Outlook

• Management shared its revised 2024 targets, adjusting initial PBT and ROE guidance lower from RM1.0bn and 7% to RM750mn and 5%, respectively. Given our PBT forecast of RM628mn, the revised PBT is still above our expectations. Nevertheless, we understand factors supporting management’s optimistic PBT assumption are the enhanced credit writing standards to manage the gross credit cost to between 10-15 bps (from 20-30 bps) but keeping the GIL ratio to 1.9% and loan loss coverage to around 100-120%. Loan growth guidance is maintained at 8%. Potential downside risks include higher CIR, which management has raised to 74% from 64% and a softer NIM assumption of 1.4% (lower from 1.6%).

• Affin's digital transformation appears to be progressing well. Management highlighted that the new Treasury System successfully went live in Q3, with the revamped AFFINMAX user interface set to launch in December. Additionally, Affin noted that Phase 1 of the new Digital Core and the updated Mobile Banking App are ready for rollout. The launch of AFFIN DIVENTIUM in September 2024 has already attracted 55 new Private Banking clients, targeting Very High Net Worth Individuals, alongside a promising pipeline of M&A deals.

• Looking ahead, management remains focused on enhancing NIM through initiatives like growing high-yielding assets, expanding CASA, and executing balance sheet management strategies. We are also optimistic about growth opportunities in Sarawak, particularly with the state now a significant shareholder in AFFIN. As a positive start, management noted that its loans and deposits in Sarawak grew by 4.5% and 22% in 3Q.

Valuation

• We raise Affin’s TP to RM3.12 from RM2.95 on the back of the upward revision to our earnings estimates. Our valuation is based on an implied PBV of c. 0.7x based on the Gordon Growth Model. We maintain our HOLD recommendation on the stock.

Source: TA Research - 25 Nov 2024