Summary
AFFIN has been growing rapidly at the expense of its weaker ROE and cost-to-income ratio. This trend is expected to persist in the foreseeable future.
Regardless, there are multiple drivers including: (i) A revamp of investment banking functions, which should lead to a recovery in fee income prospects, (ii) Multiple opportunities to improve funding profile, which has underperformed in recent quarters, (iii) A key stakeholder in the form of the Sarawak government, which should come with better non-interest income related deals amongst other growth opportunities, (iv) Considerable improvements in asset quality profile.
We initiate coverage on AFFIN with a HOLD recommendation with a TP of RM2.71 based on FY25F GGM-PBV of 0.52x.
Company Background
Affin Bank Berhad (AFFIN) is the financial holding entity of Affin Islamic Bank Berhad, Affin Hwang Investment Bank Berhad, and Affin Moneybrokers Sdn Bhd. Generali Insurance Malaysia Berhad and Generali Life Insurance Malaysia Berhad are affiliated with Affin Bank Berhad.
Affin Group provides an exhaustive array of financial products and services for individual and corporate clients. The focus market segments are categorised under essential business units such as Community Banking, Enterprise Banking, Corporate Banking, Treasury, and Investment Banking. As of 3 July 2024, Affin Bank has 125 branches in Malaysia.
Income Statement
Earnings and ROE. A steady earnings CAGR in recent years has been difficult to determine due to earnings distortions caused by the Covid-19 pandemic. Regardless, AFFIN’s ROE is consistently among the lowest in the industry due to a high cost/income ratio and elevated provisioning costs.
Management NII and NIM. AFFIN’s NIM has underperformed the rest of the industry in the last couple of years. We believe this is due to AFFIN’s aggressive loan growth strategy, which requires a high level of funding. The funding sourced is expensive, due to AFFIN’s weak deposit franchise and non-retail slant.
To illustrate, AFFIN’s average retail CASA interest rate of ~3% is above the industry high. This implies that recent CASA surges are not as beneficial to COF as once thought. In contrast, competitors have far lower retail CASA rates (we estimate closer to the ~1% mark). We believe that AFFIN has a larger proportion of pricier promo rate FDs than most of its peers.
NOII. AFFIN’s NOII makes up a large proportion of the topline, though this has declined following the disposal of its asset management arm. Fee income was nearly halved following this divestment. Regardless, AFFIN seems to be making considerable effort to plug an AHAM-shaped hole by revamping its treasury functions and investment banking franchise. Recovery has been gradual so far, but we think it will ramp up following the Sarawak government's increasing its stake in the bank.
OPEX. AFFIN’s cost/income ratio is the highest in the industry. Following its asset management arm divestment and plummeting NIMs, AFFIN has struggled with cost management and a lacklustre topline. Cost elevation drivers include rebranding costs (for its image revamp), marketing costs (to promote its new app), establishment costs (upon purchasing its new headquarters in TRX), and a major restructuring in its business operations (large-scale hiring) — alongside industry-wide cost pressures such as digitisation and wage inflation.
Expect cost growth to remain high in the near term as the Group (1) Expands its presence in Sarawak (thus having to set up new brick-and-mortar outlets) and other states and (2) Continues resolving its staff overcapacity issue (which could imply considerable severance pay in the near term).
Balance Sheet
Loans. Since the pandemic, AFFIN’s loan growth has been well above the industry average. Growth was primarily centred on its consumer and SME portfolio. While mortgages and hire purchases loans were the core drivers, the Group also rapidly expanded its higher-yielding unsecured loans to improve its NIM profile. The corporate portfolio was of lower priority due to the segment's high GIL ratio. Management asserts that it did not compromise underwriting standards to capture market share.
Deposits, CASA and Liquidity. Similar to loan growth, AFFIN’s deposit growth has been exceptionally high in the last couple of years. It hasn’t quite eclipsed loan growth – AFFIN’s loan/deposit ratio is currently very elevated. CASA growth has been particularly strong (but volatile), as evidenced by the steep climb in CASA ratio – but we suspect that this CASA may be very pricy, as the rapid growth is fuelled by extremely high rates. Deposit growth can vary wildly on a qoq basis, mainly due to lumpy corporate withdrawals.
Asset quality and provisioning. AFFIN’s asset quality is not its strongest suit, with its GIL ratio among the highest in the industry. Management repeatedly warns of potential SME and corporate portfolio issues – while the consumer segment’s GIL ratio is steadily rising. The Group used to have unpredictable, huge quarterly provisions – though we have seen no further re-occurrences since FY22.
Capital and dividends. AFFIN’s CET 1 ratio is at the lower end of its peers – its bank-level CET 1 ratio is even lower, at 11.8%. This is due to its aggressive loan growth stance, and AFFIN has already used up most of the extra capital earned from various divestments.
AFFIN guides its dividend payout to remain within the 40-60% range. It disappointed on this front in FY23, citing a weaker economic performance – implying that this could repeat if economic conditions persist. We believe that a repeat of this is unlikely despite a rather low CET 1 ratio (especially in FY24): AFFIN is unlikely to disappoint its new shareholders.
Investment Highlights
Solid fee income prospects. After disposing off its asset management arm, AFFIN has spent considerable expense and efforts in rebuilding its treasury and investment banking franchise. This will directly benefit advisory, brokerage, and fee and commission income streams.
While recovery has been gradual, this revamp is well-timed with the economic cycle: Expect sharper fee income growth spurred on by better economic prospects. More importantly, AFFIN’s improved functions should allow the Group to handle the increased load from larger, more prominent deals from its partnership with the Sarawak government.
Multiple opportunities to improve funding profile. AFFIN’s COF is currently the highest in the industry. This is due to the high funding required to maintain its loan growth, which can come at a very high cost. Notably, AFFIN houses an extremely high proportion of FDs drawn in under pricier promotional rates.
Moving forward, AFFIN’s COF profile sees multiple upside opportunities: (1) The Sarawak state government will place a decent chunk of its RM30b coffers into AFFIN, (2) Expect Sarawak businesses to utilise AFFIN as their preferred bank, (3) AFFIN’s mobile app is finally up and running, which should help with the acquisition of cheaper retail deposits, (4) The natural FD attrition from the expensive promotional bucket, and (5) Better, more stable rates for bond/debt market funding – especially since AFFIN is already heavily reliant on interbank lending. We believe the improved liquidity prospects should allow AFFIN to price down deposit rates more rationally – especially in their pricy retail CASA segment.
Aggressive capture of loan market share to persist. AFFIN will resume its high 12% loan growth target in FY25 following a lull in FY24. We are less worried about COF implications this time (for the above reasons), so the downsides are less pronounced. 12% loan growth is well above the industry average (which usually hovers in the 5-6% range), which implies that AFFIN will be taking loan market share.
AFFIN’s strong presence in Sarawak is central to this. Note that its current level of growth in East Malaysia is lower than its overall figure (Johor is the current “flavour of the month”) – implying much room for growth. We expect growth in all three segments (consumer, SME and corporate) – though the Group will reprioritise its consumer loan portfolio to maintain healthy asset quality.
Considerable improvements in asset quality. AFFIN has made laudable progress in improving its GIL ratio and LLC levels from pre-pandemic times. It intends to maintain these metrics close to current levels. Although it sees occasional impairment spikes in its SME and corporate portfolio, the overall trajectory is still moving in the right direction.
The Group is reprioritising its consumer loan portfolio once again, as management expresses uncertainty about the quality of potential SME customers (their debt servicing ability may not be adequate). Although this will likely negatively impact NIMs, we think the cross-selling opportunities and further benefits to GILs (retail loans are normally safer) and NCC profile make up for it.
Valuation & Recommendation
We initiate coverage on AFFIN with a HOLD recommendation and a target price of RM2.71 based on an FY25F PBV of 0.52x GGM-PBV valuation. (GGM Assumptions: FY25F ROE of 4.9%, LTG of 3.0%, & COE of 6.7%.) Despite solid growth prospects, AFFIN’s share price is mostly priced in by now after appreciating 34.0% year-to-date.
We favour Affin for its (i) Solid fee income prospects following considerable effort in building its investment banking franchise, (ii) Extremely high rate of loan growth and market share capture, (iv) Considerable progress made toward a healthier balance sheet.
Key Risks
Low CET 1 ratio may impede dividend payout ability. AFFIN’s CET 1 ratio is very low, with CET 1 ratio on a bank level at 12.2%. Our primary concern is that this could cut into dividend payouts, and AFFIN’s payout could come in lower than 40-60% guidance again.
Asset quality issues and large provisions. AFFIN frequently warns of impairments in its corporate and SME portfolio. It tends to make huge provisions very suddenly, though this is less common now.
NIM issues may persist. AFFIN’s COF is the highest in the industry. Since it will be resuming double-digit loan growth targets in FY25F, we worry that liquidity constraints may become an issue again.
Disclaimer
The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report.
Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against Apex Securities Berhad. Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of Apex Securities Berhad.
| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.390206 | 4.425718 |
| EUR | 5.008717 | 5.015095 |
| CNY | 0.603029 | 0.603828 |
| HKD | 0.565660 | 0.569770 |
| SGD | 3.345779 | 3.370205 |