This article first appeared in The Edge Malaysia Weekly on October 3, 2022 - October 9, 2022

ONCE perceived as a sleepy bank that was often stuck with a string of “sell” or “hold” calls by analysts, Affin Bank Bhd’s remarkable improvement in earnings and other key areas in recent times has helped it gain favour with the investment community. But can it keep the positive momentum going?

Over the last two-plus years, the group has been rigorously building up its brand, strengthening its fundamentals and investing in technology under a three-year transformation plan known as AIM22 that concludes this year.

“They’ve been chalking up good numbers and showing improvement on key things such as net interest margin, gross impaired loans ratio and loan loss coverage … so we’re seeing a nice, positive trend over the last three to four quarters,” says Chan Jit Hoong, a banking analyst at Hong Leong Investment Bank (HLIB) Research who has a “buy” call on the stock.

The group is now embarking early on the next phase of its transformation, dubbed A25, with even bigger and bolder ambitions and targets.

However, analysts are sceptical about whether these are achievable. A slew of challenges, including rising risks of a global recession next year, stiffer competition for deposits in the industry as well as higher interest rates on loans pose risks to Affin Bank’s ongoing transformation agenda, they say.

“We believe the bank’s targets are far too optimistic. In the last results briefing, management [itself] referred to them as stretch goals,” MIDF Research analyst Samuel Woo tells The Edge. He says there could be execution risks, too, given the current weak market conditions.

Among its key targets to be achieved by end-2025 are a profit before tax (PBT) of RM1.5 billion (it stood at RM704 million in 2021), a return on equity (ROE) of 10% (5.4%) and loans/financing of RM92 billion (RM51 billion).

“We deem these to be quite ambitious given the challenging macroeconomic environment ahead, and remain cognisant of potential asset quality issues that may result from overly-aggressive loans growth,” says RHB Research in a Sept 23 report, taking note in particular of the 10% ROE target and the roughly 18% loan growth compound annual growth rate (CAGR).

Another analyst points out that Affin Bank’s lofty targets could be a case of “aim for the moon, land on the stars”.

Woo reckons that Affin Bank could see some earnings volatility following the disposal of its asset management arm Affin Hwang Asset Management Bhd (AHAM), which was completed in July this year.

“We remain wary of execution risks, especially given that Affin Bank has lost a substantial chunk of its more reliable non-interest income sources [with the AHAM divestment]. It’s likely we’ll see a fair bit of volatility in the coming quarters.

“Similarly, we are still a bit sceptical on the bank’s ROE stability, given that Affin Bank funded its transformation at the cost of several core income drivers. The group has stated its intention to build more reliable non-interest income sources, and that will take time,” Woo says.

He adds: “But, we are positive about Affin Bank having made good headway in developing a healthier balance sheet, which was the source of many of its previous problems.”

The bank’s profit growth had been flattish in previous years, dragged by its high cost of funds, which was among the highest in the industry. In an interview with The Edge, Affin Bank president and group CEO Datuk Wan Razly Abdullah Wan Ali admits that it did not have a sustainable business model, with cost of funds as high as 3.85% in 2019.

“We re-engineered our balance sheet to get more CASA (current accounts and saving accounts), and managed to bring it down to 1.97% in the second quarter of 2022,” he says. CASA is a cheaper source of funds for banks. With the improvement in the cost of funds, the bank’s profitability has grown substantially.

For the financial year ended December 2021 (FY2021), Affin Bank’s net profit more than doubled to RM526.93 million from RM230.32 million a year earlier.

In the first six months of FY2022, it posted a 55% jump in net profit to RM289.6 million from RM186.9 million a year earlier. The group attributed the stellar performance to improved net interest income and Islamic banking income, all of which were driven under its AIM22 plan.

Over the past one year, its share price has gained 26.1% — stronger than most of its peers — to RM2.01 as at Sept 29, valuing the banking group at RM4.45 billion.

Bloomberg data shows that six analysts have a “buy” call on Affin Bank, while one has a “hold”, with the average 12-month target price at RM2.37. There were no “sell” calls.

“We maintain our cautious stance on Affin Bank as the AHAM earnings gap as well as asset quality concerns continue to cloud its medium-term outlook. However, a potential special dividend announcement following the sale of AHAM could act as a strong near-term re-rating catalyst, and we upgrade our call [to a ‘trading buy’ from ‘neutral’] as a result,” says RHB Research, which also lifted its target price by 20 sen to RM2.45. The bank will book a gain of about RM1 billion in 3QFY2022 from the AHAM disposal.

The bank is currently trading at 0.35 times forward price-to-book value compared with the sector’s 0.87 times, says HLIB’s Chan, who has a RM2.35 target price on the stock.

“We believe Affin Bank has softer valuations against its peers due to its less-prominent income mix in the lending space. With the disposal of AHAM, we believe its valuations should refresh to a level closer to its peers’ as its income mix becomes more comparable,” Kenanga Research analyst Clement Chua tells The Edge.

“Although, at present, its ROE appears lacking, it can be made up for by its higher-than-peer average dividend yield prospects of 6%, which could tilt the risk-to-reward for long-term investors to a more favourable rate,” he adds.

In the short term, he expects a potential special dividend from the disposal of AHAM that could trigger a “positive knee-jerk” price reaction on Affin Bank shares.

He believes that the disposal of AHAM was timely for Affin Bank to unlock its value. “While the loss of income from its asset management business could require strong efforts to make up for, the overall market performance is still highly incomparable against 2020-2021’s strong market appetite, hence any disposals during this period would be timely as the group has already reaped from the market upcycle,” Chua says.

He thinks that Affin Bank could achieve its A25 target of RM1.5 billion PBT by 2025, which is equivalent to a CAGR of 12%, as well as an ROE of 10%.

“The disposal of AHAM would be the key fuel to fund the group’s transformation process going forward, which we believe should propel the group to its targets, mainly due to their relatively lower base as compared to the larger-cap banks,” he says.

“[We] also believe the low base could be a signal of largely untapped capabilities within the group, which are now instilled to be more proactive,” Chua adds.

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