AFFIN’s 9MFY23 results missed our forecast (as NIM pressures persisted) but met market expectation. On a brighter note, it may see a wider presence in Sarawak. We cut our FY23-24F earnings by 12-7% and lower our long-term ROE inputs, resulting in a lower GGM-derived PBV TP of RM1.90 (from RM2.20). Downgrade to MARKET PERFORM from OUTPERFORM.

9MFY23 results below our expectations. AFFIN’s 9MFY23 reported net profit of RM362.7m which was below our expectation, at only 68% of our full-year forecast as we had underestimated the prolonged compression of its NIMs in 3QFY23. On the other hand, the results were within market expectation at 72% of the full-year consensus estimate.

YoY, its 9MFY23’s net interest income sunk by 17% on continued NIMs compression (1.54%, -60bps) as the group faced higher funding cost from past OPR hikes. That said, loans growth remained supportive at 12% driven by better mortgage and hire purchases. Meanwhile, its noninterest income improved drastically (+97%) thanks to forex and treasury gains which led to flattish improvement in total income. Paired with higher personnel and general expenses, its CIR rose to 68.1% (+2.6ppt). On the flipside, credit cost significantly improved to 14 bps (-52 bps) on stronger asset quality for the period. Alongside the absence of goodwill impairments, its 9MFY23’s net profit from continuing operations came in at RM362.7m (+493%). If we account for discontinued operations for AHAM, earnings would have reported a 69% decline instead.

Outlook. AFFIN’s continued NIM compression in 3QFY23 has dented its full-year earnings projections. 4Q periods are typically more competitive in the general pricing landscape and this may pose further challenges to the group. Believing its previous NIM guidance of 1.86% could no longer be met, the group updates to a targeted range of 1.45%-1.50%. As this would undermine top line, the group had widened its CIR target to 65% (from 60%) which also accommodates higher wages from earlier collective adjustments. On the other hand, the group’s maintenance of its full-year credit cost guidance of 30 bps hints that its last quarter could remain heavy with unexpected inflationary pressures hitting troubled accounts. All in, this triggers a lower pretax profit guidance of RM600m while all other metrics remain unchanged. Meanwhile, the group points to Sarawak as a new area of growth following support and interest from the state government. As of 3QFY23, it makes up 4% (RM2.8b) of its total loans books.

Forecasts. We cut our FY23-24F earnings forecasts by 12-7% mainly to account for the softer NIMs outlook. Our revised FY23F pretax profit of RM613m is close to its updated target of RM600m.

Downgrade to MARKET PERFORM with a lower TP of RM1.90 (from RM2.20). We also lower the ROE inputs in our Gordon Growth Model to 6.0% (from 6.5%) while keeping our COE of 11.5% and TG of 3.0% unchanged. This lowers our applied PBV to 0.35x (from 0.41x) on our FY24F BVPS of RM5.33. AFFIN could be seen as a high growth play with its loans acquisition rate being double of industry averages, albeit also due to its relatively smaller market share. While the stock may offer generous yields of 5%-6%, this may be fairly priced in considering its relatively lower ROE performance as compared to its peers. 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/lower-than-expected margin squeeze, (ii) higher/lower-than-expected loans growth, (iii) better/worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 20 Nov 2023