Review

• Affin Bank’s FY23 BAU profit after tax declined 36.2% YoY to RM402.2mn from RM630.1mn in FY22. The weaker YoY performance was attributed to lower operating income and higher overhead expenses. ROE stood at 4%.

• A dividend of 5.76 sen per share has been proposed, lower than 12.3 sen per share declared in 2022. This translates to a lower dividend payout ratio of 33.6% vs 50% last year.

• YoY, Affin’s reported net income declined by 3.4% as the net interest income (NII) and contributions from Islamic Banking operations contracted by 23.4% and 13.5% YoY. While NII continued to be supported by a loan expansion, which rose by around 12.3% YoY to RM66.7bn, the net interest margin (NIM) slipped by 59 bps YoY due to higher deposit rates. QoQ, NIM eased by another 4 bps to 1.42%, underpinned by a 5 bps QoQ increase in the cost of funds.

• The healthy loan growth momentum was underpinned by increases in Community Banking (+17.4% YoY), Enterprise Banking (+8.9% YoY) and Corporate Banking (+2.8% YoY). Elsewhere, total deposits expanded by 9.0% YoY. Fixed Deposits, NIDs, MMD & CMD rose at a softer pace of 4.4% YoY (-5.6% QoQ) compared to CASA (+24.0% YoY, +13.6% QoQ). The CASA ratio stood at 26.7% in 4Q23 vs. 23.5% a year ago. The increase in CASA was led by Community Banking (+34.8% YoY), followed by Corporate Banking (+16.3% YoY), and Enterprise Banking (+14.3% YoY).

• The reported non-interest income (non-NII) ballooned to RM607.3mn vs RM343.8mn in FY22, thanks to stronger net gains from financial instruments amounting to RM168.1mn (FY22: RM62.2mn). However, the net fee and commission income declined by 71.2% YoY due to the absence of portfolio management fees, which stood at RM177.9mn in FY22. Encouragingly, fee income shows gradual sequential improvements, with fees and commissions jumping to RM41.4mn vs RM14.8mn in 3Q23. Wealth income also grew by 47.8% QoQ.

• FY23 operating expenses were well managed, rising by a marginal 0.3% YoY (+7.0% QoQ). Yearly, Personnel costs softened by 2.1% YoY (+9.2% QoQ). Meanwhile, Establishment Expenses accelerated by 6.6% YoY (+3.3% QoQ), followed by Promotion and Marketing-Related Expenses (+2.5% YoY, +29.6% QoQ), and General and Administrative Expenses (+0.1% YoY, -5.9% QoQ). Nevertheless, management noted that the cost-to-income ratio deteriorated to 71.6% in 4Q23 vs. 62.6% in 4Q22 due to the NIM compression affecting revenues.

• Affin reported softer allowances for impairment losses of RM78.2mn in FY23, improving from an allowance of RM507.1mn in FY22. The net credit cost strengthened to 8 bps in FY23 vs 44 bps a year ago. The gross impaired loans ratio (GIL) also strengthened to 1.90% (FY22: 1.97%).

• Elsewhere, the group's CET1 and Total Capital Ratio stood at 14.3% and 18.2%, respectively.

Impact

• Incorporating the FY23 results, we adjust Affin’s FY24/25 net profit slightly lower to RM462.4/536.9mn from RM512.9/555.2mn. We forecast FY26 net profit to increase by 17.1% to RM628.7mn.

Outlook

• Several targets, such as PBT, NIM and CTI ratios, fell short of management's guidance. Despite that, management has set higher targets in 2024, focusing on strategic measures such as rebalancing the deposit mix by increasing CASA deposits to stem further NIM compression and tapping on the mobile banking app to cross-sell and deepen the client wallet share. Efforts are also directed towards a turnaround in corporate books, focusing on potential growth in the Sarawak region and ESG financing.

• For 2024, management is targeting to achieve a PBT of RM1.0bn and an ROE of 7%, underpinned by a loan growth target of 8%, better cost efficiency measures to bring the CTI ratio down to 64% and enhanced credit writing standards to manage the gross credit cost to between 20- 30 bps, keeping the GIL ratio to 1.9% and loan loss coverage to around 100-120%.

• Looking ahead, management will be extending the A25 Transformation Plan into a more ambitious AX28 Plan. Briefly, the AX28 strategy outlines vital pillars, including private banking to support the T20, a new digital core for product innovation and increased scale, a greater presence in Sarawak, and a substantial commitment to ESG initiatives. However, without more details available at this juncture, we believe some of the 2028 targets, such as achieving a PBT of RM1.8bn and an ROE of 12%, appear ambitious.

Valuation

• Updating the latest beta assumption obtained from Bloomberg, we raised Affin’s TP to RM2.25 from RM2.15. Our valuation is based on an implied PBV of c. 0.45x based on the Gordon Growth Model. Given that Affin’s share has risen steeply and ahead of its fundamentals, we maintain our SELL recommendation on the stock.

Source: TA Research - 1 Mar 2024