AFFIN's 9MFY24 results were within expectations. The group had previously aspired for better performance in funding costs but remain pressed by the market, prompting a cut in FY24F NIMs, PBT and ROE targets. Given a net credit cost guidance being maintained, we are wary of 4QFY24 seeing a backloading of provisions. We tweaked our earnings slightly as we incorporate 3QFY24 numbers, while maintaining our UNDERPERFORM call and GGM-derived PBV TP of RM2.20.

9MFY24 within expectations. AFFIN's 9MFY24 net earnings of RM374.6m came in at 79% of our full-year forecast and 73% of consensus full-year estimate. With credit cost guidance revised down to 10-15 bps in spite of a net writeback position YTD, we estimated that 4QFY24 could be left with up to RM150m in provisions with bad debt recoveries looking to also subside.

YoY, 9MFY24 loans expanded by 10% with mortgage business (being 30% of loans book) contributing the most towards growth. As opposed to 9MFY23 NIMs of 1.54%, 9MFY24 saw continued strains from funding cost, reporting a NIM of 1.43%; the latter figure takes into account liabilities management strategy of borrowing in USD and swapping to MYR, where gains/losses on these swaps reflected in NOII have been presented as an adjustment to NIM, without which reported NIMs for 9MFY24 would have been only 1.33%. Overall, this led NII to gain by 5%.

Meanwhile, NOII was boosted by 14% mainly driven by higher forex and stockbroking segments amid greater market volatility. Though total income grew by 8%, CIR crept up to 74.6% (+6.5 ppts) as IT and personnel investments were heavier, dragging PPOP by 15% instead.

However, as AFFIN continued to see favourable progress in its loan recoveries, it remains at a net writeback position with -17 bps credit cost (9MFY23 at 14 bps) and supported 9MFY24 earnings growth of 3% to RM374.6m.

QoQ, 3QFY24's NII grew by 9% thanks to NIMs rising by 9 bps from the abovementioned liability management measures. However, we estimate that it would have declined by 6 bps without it. NOII (+62%) was similarly uplifted by more forex-based transactions. With further writebacks coming through in 3QFY24, net income extended to RM145.8m (+23%).

Highlights. AFFIN continue to enjoy above-industry 5.6% loans growth trajectory, supported by sustained real estate demand. While this shift to higher quality but lower yield would mitigate gains in interest income, its cost of funds remains at the mercy of market competition and denying its aspired NIMs level of 1.60%. Though the group mentioned it would be less participative in 4QCY's seasonally fierce fixed deposits market, a relatively high LDR of 95.5% may indicate the need to shore up capital further for FY25's loans growth strategies.

On asset quality, the group is gradually improving GIL to 1.74% (-10 bps YoY) with an overlay balance of RM330m. That said, we gathered that although the group is trimming is gross credit cost guidance, it remains positive at 10-15 bps (from 20-30 bps) for the year. This suggests total impairment levels to report up to RM150m assuming the group does not see provisions to be adequate. Following the group's recalibration of NIMs expectations, target has been lowered to 1.40% (from 1.60%, which we believe is without the impact of liability management initiatives).

Cascading from the softer projected topline, the following revisions to FY24 guidance have also been made: (i) PBT to RM750m (from RM1b); (ii) ROE to 5% (from 7%); and (iii) CIR to 74% (from 64%).

Early signals for sector NIMs? While earnings were within expectations, we had anticipated for AFFIN's NIMs to be stable in more organic terms (i.e. without significant liability management initiatives). Further, cheaper cost of funds should have been derived with a wider CASA mix of 26.9% (2QFY24: 25.9%, 3QFY23: 23.2%). However, it would appear that for AFFIN's case, the cost to maintain its non-CASA products are perhaps rising. All considered, this kept AFFIN's deposits base growth of 3.27% YoY to be in line with the industry's 3.26% as of Sep 2024.

Though still early days in 3QCY24 results season, we are of the view that the conditions experienced by AFFIN could be isolated, given the group's explicit mention to compete more heavily out-of-season in 3QCY24 as opposed to 4QCY24 for deposits. That said, we suspect that in spite of this, AFFIN may still experience suppressed NIMs and possibly fall short on its revised targets.

Forecasts. Post results, we tweak our FY24F/FY25F earnings by +1/-1% from model updates on 3QFY24 numbers, mostly due to adjustments to loans base. We note that our forecast for FY24 is still below the group's target, which we opt to maintain amid a more conservative view against the group's immediate term delivery.

Maintain UNDERPERFORM and TP of RM2.20 based on an unchanged GGM inputs and FY25F PBV of 0.43x (COE: 10.5%, TG: 3.0%, ROE: 6.25%). AFFIN's share price saw strong appreciation with the inclusion of Sarawak State Government amongst its shareholders, spurring hopes of substantial spillovers from there. While AFFIN may enjoy such benefits and premium as a Sarawak proxy, current price levels indicate a PBV of 0.65x which demands a ROE input of 8.5% in our GGM assumptions (or net profit of c.RM950m). Our 6.25% ROE incorporate some benefit of the doubt and we await to assess more initiatives and execution.

While we opine that this may be a long-term journey as it widens its income streams, we reckon near-term catalysts could emerge from the Sarawak State Government with large CASA deposits injection to AFFIN. From our own model estimates, every RM1b in new CASA deposits could lower cost of funds by 4 bps and may generate a ROE improvement of 7 bps.

There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 25 Nov 2024