Review

• Affin Bank’s reported 9M23 profit after tax declined by 69.4% YoY to RM362.7mn from RM1,186.9mn in 9M22. Excluding contributions from AHAM, Affin’s BAU profit after tax would have risen by 1.5% YoY. YTD ROE stood at 4.48% vs. 5.65% a year ago.

• YoY, Affin’s net income declined by 9.8% as the reported 9M23 net interest income (NII) and contributions from Islamic Banking operations contracted by 19.8% and 11.8% YoY. While NII continued to be supported by a loan expansion, which rose by around 12.3% YoY to RM64.3bn, the net interest margin (NIM) slipped by 11 bps QoQ and 55 bps YoY to 1.46%. The steep contraction in NIM was due to the full impact of higher deposit rates, as the cost of funds ballooned by 119 bps YoY.

• The healthy loan growth momentum was underpinned by increases in Community Banking (+19.2% YoY) and Enterprise Banking (+13.1% YoY). Meanwhile, gross loans in the Corporate Banking segment declined by 1.4% YoY. Elsewhere, total deposits expanded by 0.2% QoQ and 12.0% YoY. Fixed Deposits, NIDs, MMD & CMD rose at a softer pace of 9.4% YoY (+0.1% QoQ) compared to CASA (+21.4% YoY, +0.3% QoQ). The CASA ratio stood at 23.2% in 3Q23 vs. 21.4% a year ago. The increase in CASA was led by Community Banking (+31.7% YoY), followed by Corporate Banking (+20.5% YoY), and Enterprise Banking (+2.9% YoY).

• The reported non-interest income (non-NII) almost doubled to RM449.7mn vs RM228.8mn in 9M22. Encouragingly, the net fee and commission income broadened by 6.5% YoY. Affin also reported stronger net gains from financial instruments amounting to RM135.6mn (9M22: RM41.8mn), substantial unrealised FX gains and a gain on disposal of associates of RM25mn.

• 9M23 operating expenses decreased by 5% YoY (+18.3% QoQ). Yearly, Promotion and Marketing-Related Expenses declined by 17.6% YoY (+7.5% QoQ), followed by Personnel Costs (-7.6% YoY, +19.0% QoQ), muting the increase in General and Administrative Expenses (+4.8% YoY, -5.1% QoQ) and Establishment Related Expenses (+1.0% YoY, +29.3% QoQ). Nevertheless, management noted that the cost-to-income ratio rose to 68.1% in 3Q23 vs. 63.2% in 3Q22 due to the NIM compression affecting revenues.

• Affin reported allowances for impairment losses of RM63.9mn in 9M23, improving from an allowance of RM354.0mn in 9M22. The net credit cost stood at 7 bps in 9M23 (9M22: 23 bps). The loan loss coverage ratio steadily expanded to 127.1% from 112.3% a year ago. While the gross impaired loans ratio (GIL) also strengthened to 1.84% (9M22: 1.91%), there was a 6 bps sequential increase in the GIL ratio from 1.78% in 2Q due to some upticks in the Enterprise and Corporate Banking portfolios.

• Elsewhere, the group's CET1 and Total Capital Ratio stood at 14.6% and 18.1%, respectively.

Impact

• We tweaked our NIM slightly lower to align with the 9M results performance. With that, we reduced Affin’s FY23/24/25 net profit to RM481/513/555mn from RM515/551/596mn.

Outlook

• Although results came largely within expectations, management updated some of its FY23 targets, again. Post the 9M23 results, Affin is now guiding for an even softer ROE of 4.5% (vs. 5.8%) for FY23 (FY22: 5.6%), underpinned by loan growth of 12%, softer NIM of 1.45-1.5% (vs. 1.86%), gross credit costs of around 30 bps, and a higher cost-to-income ratio of 65% (vs 60%).

• Management foresees the possibility of further tapering of loan growth in FY24 to mitigate potential risks associated with the ongoing macro challenges. Elsewhere, the focus will continue to be intensified towards monitoring asset quality and ensuring sufficient buffers over its loan/financing exposures.

• On a positive note, Affin’s total assets remained in excess of RM100bn, on track with Affin’s A25 transformation plan. In terms of income, we note of stronger BAU fee income, as Affin fills the gap from the sale of AHAM with new revenue streams from Debt Capital Markets advisory flows. Management will also be looking to scale up in the high-margin businesses and fee-based income such as FX, Bancassurance, Wealth Management and Trade.

• The recent launch of a new Mobile App in October 2023 is expected to continue to play a pivotal role in building Affin’s CASA franchise, stabilising NIM and strengthening its customer base.

Valuation

• Updating the latest beta assumption obtained from Bloomberg, we raised Affin’s TP to RM2.15 from RM2.05. This is despite the slight downward revision to our earnings forecast. Our valuation is based on an implied PBV of c. 0.47x based on the Gordon Growth Model. Given the broader risk-reward potential, we upgrade Affin from sell to HOLD.

Source: TA Research - 20 Nov 2023