• Keep SELL with a higher MYR1.50 TP from MYR1.30, 14% downside. We revise our TP on lower risk premium assumptions and roll forward our base year to 2021, but made no changes to the earnings forecasts. Buoyed by massive liquidity in the capital market, Affin’s share price has staged a 13% rally in the past one month. We think the current valuation is hardly supported by the bank’s fundamentals – which will remain subdued – and maintain our recommendation on the stock.

• Earnings and TP. We made no changes to our earnings forecasts, but lift our TP to MYR1.50 after imputing a lower risk premium assumption in our GGM valuation – in line with the latest house assumptions. We also roll forward our base year to 2021, as we believe market has looked past 2020 and is focusing more on the coming year. Our revised TP values Affin at a GGM-derived FY21 P/BV against an ROE of <4%.

• 1Q20 results recap. Affin reported MYR124m in PATAMI (-10% YoY, +1.2% QoQ), which was entirely lifted by significantly higher realised gains in bond investments. NII fell 1.5% QoQ on a lower loan base despite NIM expanding 14bps QoQ to 1.86% due to the more optimal deposit mix. ROE remains depressed at 5.34%, as the higher non-II was wiped out by the huge spike in credit cost (1Q20: 100bps) (see our 1 Jun 1Q20 results report Higher Provision Weighs On Earnings for more details).

• 2020 outlook. We foresee significant earnings headwinds for Affin in the near term. 2020 undoubtedly poses an unprecedented challenge for the bank due to the economic impact of COVID-19 and the Government’s Movement Control Order. We see risks of Affin falling short of its FY20 gross credit cost guidance of 50bps.

• Unlike its peers that will likely see recovery in 2021, Affin’s path to recovery will be impeded by higher credit costs, in our view, as the bank steps up in building LLC ratio (ex-regulatory reserves) to c.70% (1Q20: 57.5%). We expect its ROE to remain depressed in FY20-22 (see our 2 Jun report Pressure On Earnings Intensifies; D/G to SELL for more details on its outlook).

• Key risks to our call include better-than-expected NIM outlook, higher-than- expected non-II, and lower-than-expected credit costs.

Source: RHB Research - 11 June 2020