This article first appeared in The Edge Malaysia Weekly on May 16, 2022 - May 22, 2022

AFFIN Bank Bhd has certainly been busy on the divestment front. In just five months, the lender — controlled by Lembaga Tabung Angkatan Tentera (LTAT) — has made strategic moves to sell its asset management business, a minority stake in RAM Holdings Bhd and, in the latest move last week, a portion of its insurance business.

Proceeds from the disposals will boost its capital and has raised investors’ expectations of better or special dividends ahead, thus fuelling interest in the lender’s shares this year.

The stock, which traded within a narrow range for much of last year, shot up this year, gaining 11.96% year to date. It closed at RM2.06 last Thursday, giving the bank a market capitalisation of RM4.38 billion.

Analysts tell The Edge that Affin Bank’s move to divest stakes in some of its non-core banking businesses is not that unusual as some of its rivals have made similar moves in recent years, especially in the insurance space.

In July last year, AMMB Holdings Bhd undertook a partial disposal of its general insurance business to Liberty Insurance Bhd. In December 2019, RHB Bank Bhd tried to sell its entire 94.7% stake in its insurance arm to a unit of Japan-based Tokio Marine Holdings Inc.  And last December, Alliance Bank Malaysia Bhd said it would sell its stockbroking business to Phillip Futures Sdn Bhd.

“Basically, what it is trying to do is be more focused on the commercial banking operations,” Chan Jit Hoong, a banking analyst at Hong Leong Investment Bank (HLIB) Research, says of Affin Bank’s recent divestments.

Nevertheless, industry observers note that Affin Bank’s quick succession of divestments is interesting. LTAT and its cash-strapped subsidiary Boustead Holdings Bhd hold 34.8% and 20.9% equity interest respectively in the lender, while Hong Kong-based Bank of East Asia Ltd has 23.7%.

“While Affin Bank hasn’t actually said if it plans to pay out a special dividend, many expect that it will, given that its shareholder is in dire need of cash,” one observer tells The Edge, referring to Boustead Holdings. The diversified conglomerate, in which LTAT has a 59.4% stake, has been looking to sell assets, shore up its balance sheet and pare down debts to improve its financial standing.

Affin Bank’s series of divestments started in late January, when it announced that it would sell its entire 63% stake in Affin Hwang Asset Management Bhd (AHAM) to private equity firm CVC Capital Partners for RM1.42 billion cash.

The sale would result in a disposal gain of RM1.04 billion, which Affin Bank plans to use to fund its core business of lending and for working capital needs.

Then, last month, CTOS Digital Bhd said it had acquired a 9.1% stake in RAM Holdings from three entities — including 3.6% from Affin Bank and 2% from Affin Hwang Investment Bank Bhd — for RM25.06 million cash.

And, in the latest move, Affin Bank announced in a Bursa Malaysia filing last Monday that it had obtained the go-ahead from Bank Negara Malaysia and the Ministry of Finance to sell a 21% stake in AXA Affin Life Insurance Bhd (AALI) and 2.95% in AXA Affin General Insurance Bhd (AAGI) to Generali Asia NV, the prices of which have not been disclosed. The lender currently owns 51% of AALI and 49.95% of AAGI.

Ultimately, the plan — following an earlier agreement between Affin Bank and Generali last June — is to merge their respective general insurance business in Malaysia under AAGI. Following that, they will incorporate a new local company that will house both AALI and AAGI.

Affin Bank is expected to hold a 30% stake in the newly enlarged insurance company while Generali will control the remaining 70%. It is worth noting that last June, Generali said it planned to buy Multi-Purpose Capital Holdings Bhd out of their joint-venture general insurance business, MPI General Insurance.

“At the end of the day, Affin Bank will end up with a stake in a much larger insurance entity. Hence, we don’t expect it to lose out much in terms of profit contribution from the insurance side. The bigger question is, how will it plug the earnings hole from the asset management side?” remarks HLIB Research’s Chan.

Given that the sale of AHAM is expected to be completed in the third quarter of this year, the loss in earnings contribution will likely be reflected in Affin Bank’s final-quarter financial results.

Chan previously noted in a report that AHAM accounts for 20% to 30% of Affin Bank’s profit before tax and that losing this portion of business may shave the lender’s return on equity (ROE) next year by 100 to 150 basis points.

“Frankly, it will be difficult to plug the gap left by AHAM by relying solely on the commercial banking business. Moreover, the bank’s ROE will be hit, given the enlarged equity base from the disposal gain. However, it does have the option of paying a special dividend, which could help ease the ROE pressure,” he tells The Edge.

Bloomberg data shows that four analysts, including Chan, have a “buy” call on the bank’s stock while two have a “hold’ and one, “sell”. The average 12-month target price is RM2.05.

“The disposals may lead to generous returns to shareholders. Even without the disposals, we reckon the group could generate yields of 5% to 6% based on recent performances,” Kenanga Research banking analyst Clement Chua tells The Edge. He has an “outperform” call and RM2.40 target price on the stock.

Chua believes the disposals will also benefit the group in terms of refreshing its identity as a commercial bank comparable with its peers.

“In terms of scale of business, the group has always had an even mix of banking and non-banking businesses contributing to its profits. We reckon this had, over time, led to the disparity in trading valuations between Affin Bank and its contemporaries. It trades at a price-to-book value (PBV) of about 0.4 to 0.5 times versus the peer average of around one time. The group would ultimately be smaller without these assets, but the market may recalibrate valuations accordingly,” he opines.

HLIB’s Chan notes that the group’s operating metrics such as loan growth, margin expansion and asset quality also seem to be improving. Last year, Affin Bank reported a 129% increase in net profit to RM526.93 million and declared a dividend per share of 12.5 sen (based on a 50% payout ratio) compared with just 3.5 sen previously, which came in higher than analysts had expected.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.