We hosted AFFIN’s President & Group CEO, Datuk Wan Razly Abdullah and CFO, Ms. Joanne Rodrigues for updates and clarification on recent developments. FY21 performance depends on a strong uplift in 4QFY21 from economic reopening and the management affirms its FY22 targets. While we are conservative with our prior estimates, we enhance our deposits growth projection and loosen our cost assumptions closer towards management’s targets. Maintain UP but raise our TP to RM1.40 (from RM1.25) following said revisions.

Strong targets for FY22. As part of the AIM22 initiative, management aspires to achieve the following for FY22, being: (i) PBT: >RM1b; (ii) CASA: >25%; (iii) CIR: <55%; (iv) ROE: 7%; and (v) GIL: <2.5%. Strategies to achieve these targets involve building a stronger base for its wealth management business and transforming operating ecosystems. The group intends to capitalise on its digital banking propositions to gain more CASA thereby keeping cost of funds low. Management opines that there should be little to no cannibalisation to its existing products as they are targeting different consumer markets. On the side, the group also aims to bolster is exposure in sustainability with a target of 10% ESG financing as a proportion to its total loans by 2025. Greener practices will be implemented over time to enhance operational sustainability.

The joint venture with Generali Asia N.V. will likely assist in achieving the said PBT target, as it will position the group to be second largest general insurance player in the country (est. RM2.04b gross written premium) while benefitting from various operational synergies. The deal is pending approval from Bank Negara Malaysia but still on track to be completed by 1HFY22.

TRA as of Sep 2021 at 29%. The rise in R&R accounts did not come as a surprise (13% at Jun 2021) as there were heightened applications coming from the T20 segment, similar to peers. While management is not concerned about repayments, the group will continue to book overlays out of prudency. We anticipate that its earlier FY21 credit cost target of ~40 bps could likely trail closer to ~50 bps (1HFY21: 53 bps).

Regarding the RM410m Raffles Education headlines, management described that it would be viewed as delinquent and would take the necessary measures for recovery. That said, the account makes up less than 1% of the group’s total loans (1HFY21: RM47.3b). On the flipside, the group is optimistic that its exposure in the hospitality business (<2% of total loans) is regaining financial health which we believe could translate to better staging.

Management also clarified that the prosperity tax’s impact is at entity-level. Though this would translate to a lesser tax burden, the group’s key business units (i.e. commercial, investments, asset management) still make up most of the group’s pre-tax earnings (>90%). As such, we anticipate FY22 effective tax rate to still linger at c.30%, which we had factored in.

Post update, while we leave our FY21E earnings unchanged, we raise FY22E earnings by 15%. Given a strong pipeline of consumer-centric products, we believe this should drive the group’s ability to capture deposits. Meanwhile, we loosen our CIR assumptions to factor in better cost structures going forward. That said, our estimates are still far below management’s FY22 targets, as we are still highly cautious amidst the challenging landscape presented by Covid-19, albeit the encouraging recovery.

Maintain UNDERPERFORM but with a higher TP of RM1.40 (from RM1.25). Our TP is based on a FY22E GGM-derived PBV of 0.29x (1.5SD below 5-year mean), which we slightly nudged on an improved beta. Though the group is poised for recovery, its ROE remains wanting as opposed to peers.

Risks to our call include: (i) lower-than-expected margin squeeze, (ii) higher-than-expected loans growth, (iii) better-than-expected improvement in asset quality, (iv) stronger capital market activities, (v) favourable currency fluctuations, and (vi) changes in OPR.

Source: Kenanga Research - 5 Nov 2021