AFFIN’s FY23 results and dividends disappointed expectations from income-related challenges. That said, the group believes it is in a better state to achieve its targets with longer-term initiatives being drawn down. Details on discussions with the Sarawak State Government were not disclosed. We cut our FY24F earnings by 9% and lower our TP to RM1.80 (from RM1.90). Maintain UP.

FY23 missed. AFFIN’s FY23 reported net profit of RM402.2m came in 14% and 15% below our full-year forecast and consensus full-year estimates, respectively. The negative deviation was attributed by deeper- than-expected NIM compression alongside heavier personnel cost pressures. The group’s declared dividend of 5.76 sen almost disappointed our 11.0 sen expectation as alongside the softer earnings, pay-out also eased to 34% (vs our 50%) to preserve capital.

YoY, its FY23 net interest income dipped by 19% from diminishing NIMs (1.50%, -65 bps) following stressed funding cost, offsetting the group’s 12% loans growth. That said, non-interest income surged 77% thanks to better investment gains, cushioning the decline in total income to just 3%.

Cost-wise, operating expenses rose by 8% mostly on the back of higher establishment costs which led cost-income ratio to creep to 71.6% (+9.0ppt). On the flipside, provisions significantly improved to 13bps (-66 bps) from more effective collections. All in, this translated to a higher FY23 net profit of RM402.2m (+>400%), excluding discontinued AHAM operations within the group.

QoQ, 4QFY23 total income decreased by 3%, this time due to lower sequential investment income while net interest income leveraged from a higher loans base. Operating expenses also saw higher personnel costs, but the key drag to 4QFY23 earnings of RM39.5m (-61%) was due to higher effective taxes.

Briefing highlights. A more-than-expected challenging 4QFY23 environment slowed the group’s efforts to elevate its core banking business, mostly attributed by funding costs being tighter. Missing its RM1.0b pretax profit target in FY23, the group believes FY24 could provide a more reasonable environment to deliver it.

1. Its 12% loans growth which outpaces industry average (5%) was mostly derived from strong community banking momentum with mortgages still being supportive. For FY24, the group eyes a more conservative trajectory of 8%, with greater expectations on SMEs in the consumer space.

2. NIM elevation to be progressive, earmarked to average at 1.60% where the group believes its expansion could come from its continuous gains in CASA while being able to selectively reprice its books. We note that several large cap peers are anticipating further deterioration of NIM with retention possibly coming at the cost of market share. This may indicate that AFFIN could still be slightly more competitive with its deposits in the near term.

3. Credit cost guidance of 20-30 bps may appear as a prudent target for the group, with its past overlays being allocated to already problematic accounts.

4. AX28+ was unveiled as a long-term initiative for the group to bring pretax profit to RM1.8b. It is gathered that aside from aggressive growth strategies, the group’s new Sarawak State Government backing could possibly propel its performance by enabling more opportunities there. That said, no details on a discussed increase in stake were shared, pending official announcements release.

Forecasts. We trim out FY24F earnings by 9% mainly on softer net interest income inputs. Meanwhile, we introduce out FY25F numbers which for now, only reflects a ROE of 5.5% (behind the group’s 8% target) as we await more favourable quarterly performances before adjusting for more aggressive assumptions.

Maintain UNDERPERFORM with a lower TP of RM1.80 (from RM1.90). We rolled over our valuation base year to FY25F with unchanged GGM inputs and PBV of 0.35x (COE: 11.5%, TG: 3.0%, ROE: 6.0%). AFFIN’s share price saw strong appreciation with the inclusion of Sarawak State Government amongst its shareholders, spurring hopes of substantial spillovers from there. We believe it could be overbought with our abovementioned discussions indicating that immediate benefits need to be more meaningful. Paired by the group’s below-industry ROE, we view risk-reward to be unfavourably skewed. 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 - 1 Mar 2024