• Upgrade to TRADING BUY from Neutral, with new MYR2.45 TP from MYR2.25, 18% upside and c.7% yield. We maintain our cautious stance on Affin, as the Affin Hwang Asset Management (AHAM) earnings gap as well as asset quality concerns continue to cloud its medium-term outlook. However, a potential special dividend announcement following the sale of AHAM could act as a strong near-term re-rating catalyst, and we upgrade our call as a result.

• Key drivers for 2H22F. Recall that in 1H22, Affin achieved a ROE of 5.8% (annualised), which was short of its 7% target for the year. Management is looking towards the higher-margin enterprise and community banking segments to make up lost ground in 2H22F. The bank will also launch its A1addin digital bank and an updated mobile banking application in 2H to help boost CASA deposits. Elsewhere, management is confident of a rebound in its investment banking operations, and will look to bring CIR to a level below 60% (1H22 CIR: 63.5%).

• Potential special dividend from AHAM disposal. Affin will book a c.MYR1bn gain from the disposal of AHAM in 3Q22. We understand that a portion of the proceeds will be used to increase general provisions and to support loans growth up to FY24F, with the remainder to be distributed as special dividends. Our calculations indicate that the bank has capacity to pay a special dividend of 11 sen/share from the AHAM proceeds, which is equivalent to an additional 5% yield.

• 100% LLC a comforting measure. Management re-emphasised its desire to achieve LLC of 100% by end-FY22. This will require over MYR200m in additional provisions, which management is planning to carve out from the AHAM disposal gains. After factoring in the additional provisions, our FY22F credit cost is raised to 56bps (from 18bps), which brings our net profit forecast for the year to MYR1.40bn (from MYR1.56bn).

• AIM25 targets. Affin reiterated its new metamorphosis plan for FY22F-25F, with a 10% ROE target and c.18% loans growth CAGR being key highlights. We deem these to be quite ambitious given the challenging macroeconomic environment ahead, and remain cognisant of potential asset quality issues that may result from overly-aggressive loans growth. For now, we have not yet made forecasts for FY25.

• Forecasts and TP. We lower our FY22F net profit by 10% after factoring in additional provisions, but our FY23F-24F are kept flat. Our TP, which includes an ESG premium of 2%, is raised to MYR2.45 (from MYR2.25) after lowering our cost of equity input to 9.0% (from 9.5%) in view of potential special dividends. Affin’s medium-term outlook appears unclear, but we deem the near-term thesis to be compelling, and thus we recommend a TRADING BUY on the counter.

Source: RHB Research - 23 Sep 2022