AFFIN’s 1HFY24 results were within expectations but may see pressures in 2HFY24 as repayment stress emerges, undermining the write-backs seen YTD. The group may be more selective with its acquisition of SME customers and deposits which may also translate to slower growth in the near-term. Still, we await initiatives on Sarawak State Government’s entry to AFFIN, albeit postponed to end-FY24. We trim our FY24F-FY25F earnings while maintaining our UNDERPERFORM call and GGM-derived TP of RM1.80.

1HFY24 within expectations. AFFIN’s 1HFY24 net earnings of RM228.8m made up 47% of both our full-year forecast and consensus full-year estimates.

YoY, 1HFY24 loans grew by 11% which was mostly propelled by mortgages. That said, as NIMs still show compression to 1.42% (-21 bps) from stubborn funding costs, NII declined by 3%. Net earnings for the period also declined (-13%) largely pulled by higher personnel cost from union wage increases and establishment costs from ongoing IT investments (CIR at 74.7%, +10.0ppt). A net credit cost writeback of 10 bps was also noted in 1HFY24. While the group did not elaborate on what a normalised provision should be, assuming no writebacks were incurred, we estimate 1HFY24 annualised credit cost for 1HFY24 to come in at c.26 bps, within the group’s initial guidance of 20-30 bps.

QoQ, 2QFY24 tracked similarly with the above-mentioned which saw an expansion in net profit by 8% following sequentially lower establishment costs and one-off accounting adjustments from its 30%-associate, Generali Insurance (estimated at c.RM4m). Stripping out the adjustment would translate to a lower earnings growth of 4%. We also highlight that NIMs softened (-4 bps), diverging from the trajectory of peers as cost of funds tightened further with the acquisition of better quality customers.

Highlights. While AFFIN continues to report above-industry loans growth rate, the group may ease from previously aspired SME accounts, sensing higher repayment stress from unfavourable macro. This appears to be contrary to trends seen by its peers which may suggest that they have been more selective with their approvals, in line with the strategy laid out in our 23 Jan 2024 report to better manage asset quality. In addition, repayment stresses are also seen in its mortgage books with a GIL uptick to 1.42% (1QFY24: 1.29% vs industry of 1.35%) due to softness in collections from investment property buyers. That said, the group is less concerned in this space due to them being collateralised.

NIMs pressure also appears to persist for AFFIN as funding costs continue to be tied to costlier corporate accounts. This is in spite of its deposit base declining by c.1% and shift to a higher CASA of 25.9% (+2.7 ppt).

While the group is demonstrating mixed realisability of its FY24 targets, namely: (i) credit cost of 20-30 bps; (ii) CIR at 64% (1HFY24: 74%); and (iii) NIM at 1.60%, they continue to refrain from revising following further internal reviews to be conducted

Sarawak still in the picture. We understand that the postponement of the SPA between the Sarawak State Government and LTAT on 19 July 2024 was due to further clarifications required from BNM prior. The group indicated that all other processes are duly completed and are still slated to proceed before end-FY24.

Forecasts. Post results, we tweak our FY24F/FY25F earnings by -2/-3% to update for slightly lower NIMs and loans growth.

Maintain UNDERPERFORM and TP of RM1.80 based on an unchanged GGM inputs and FY25F 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. 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 profits of c.RM950m). Our 6.0% ROE gives some benefit 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 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 of 4 bps and may generate a ROE improvement of 7 bps.

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 - 26 Aug 2024