Affin - AHAM Profit Gap, Higher LLC Likely Dampeners

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-0.36 (13.79%)
  • Stay NEUTRAL, new MYR2.25 TP from MYR2, 7% upside, c.6% yield. Affin’s 1H22 results are within expectations. Management maintained FY22F guidance, signalling a softer 2H22 with potential moderation in loan growth and higher credit costs, as the bank weighs pushing LLC to 100% vs its earlier target of 90%. Post adjustments for the Affin Hwang Asset Management (AHAM) divestment, core ROE would be flat at 5.4% for FY22F. The push for higher LLC – while a positive for asset quality – will likely be an overhang on the share price.
  • 1H22 earnings in line. 2Q22 PATAMI rose 25% YoY to MYR146.9m (+3% QoQ), bringing 1H22 earnings to MYR289.6m (+55% YoY) – at 54% of our and Street’s FY22F. Reported ROAE strengthened to 5.8% vs 3.9% in 1H21, but was below the FY22F target of 7%. CET-1 ratio was a solid 13.44%. No dividend was declared for 1H22. Management hopes to get board approval for a special dividend following the MYR1.54bn sale of its 63% interest in AHAM on 29 Jul 2022.
  • Loan growth to soften in 2H22. Loans grew a robust 7.8% YTD June, or an annualised 15.6%. This was driven mainly by residential mortgages (+22% annualised), hire purchase (+12%) and personal loans (+70%). Although loan growth exceeded FY22F target of 12%, management is not raising its guidance. Management believes loan demand will taper off in 2H22 as customers are turning cautious, given the macroeconomic uncertainties.
  • Rising cost of funds to moderate NIM expansion. In 2Q22, NIM rose 7bps QoQ to 1.99% aided by the 25bps hike in the Overnight Policy Rate (OPR). With CASA deposits not at an optimal level (CASA ratio: 21.5%), Affin would have to rely on fixed deposits (FD) to fund its lending business. Already, FD grew an annualised 27% in 1H22 vs CASA growth of 5% annualised.
  • Plans to raise LLC to 100%. GIL ratio improved to 2.28% (1Q22: 2.43%) while LLC rose to 80% (1Q22: 74.54%). Gross credit cost was 31bps in 1H22, in line with management guidance. While confident LLC can reach 90% by end 2022, management is now weighing the possibility of raising LLC to 100% given the capital boost from the AHAM divestment. Assuming no recoveries, raising LLC to 100% would mean additional credit cost of 100bps.
  • Earnings and TP. To reflect the AHAM sale, as well as expectations of better NIM and lower credit costs, our core net profit is maintained at MYR536m for FY22F but lowered by 7-8% for FY23F-24F (see Figure 3). Our TP is revised to MYR2.25 based on GGM-derived P/BV of 0.44x and a 2% ESG premium using the RHB in-house methodology.
  • Affin 2025 Metamorphosis 2.0. Management unveiled its 3-year strategic plan which aims to change the bank’s architecture to an omni-channel distribution model, with a focus on customer centricity and hyper personalisation. The financial targets include a MYR1.5bn pre-tax profit (MYR704m), 10% ROE (FY21: 5.4%), loan book of MYR92bn (FY21: MYR51bn) and a doubling of its customer base to 2m customers.

Source: RHB Research - 25 Aug 2022

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