KUALA LUMPUR (Jan 31): Some analysts are cautious of the potential long-term impact on Affin Bank Bhd’s earnings as well as its return on equity (ROE) arising from the sale of its entire 63% stake in Affin Hwang Asset Management Bhd (AHAM).

This is due to the loss of AHAM's earnings contribution; CGS-CIMB noted that the asset management unit contributed a net profit of RM72 million to Affin Bank for the financial year ending Dec 31, 2020 (FY20).

“Assuming profit contribution of RM88 million from AHAM in FY23F (three-year CAGR [compound annual growth rate] of 7% in FY21-23F) against interest income of RM31.9 million (net of tax) from the proceeds of RM1.4 billion from the divestment (assuming interest rate of 3%), the deal results in a decrease of RM56.3 million or 10.7% in our projected FY23F net profit (NP) for Affin Bank,” said the research house’s analyst Winson Ng in a note on Monday (Jan 31).

Last Friday (Jan 28), Affin Bank via its 100%-owned subsidiary Affin Hwang Investment Bank (AHIB) signed an agreement to dispose of its stake in AHAM to Starlight Asset, an investment holding company incorporated by funds managed by CVC Capital Partners for RM1.42 billion.

“The group will recognise profit from divestment of RM1.07 billion for the sale of its 63% stake in [AHAM] to CVC. The disposal will allow the group to realise a premium based on the consideration, which represents a historical price to AUM [asset under management] and PE [price-earnings] multiple of 3.1% and 19.7 times respectively, based on [AHAM’s] audited financial statements for the financial year ended Dec 31, 2020 [FY20],” said Affin Bank in a statement.

Ng said the deal did not come as a surprise, noting that Affin Bank has been exploring various options to improve its capital ratios, including asset sales.

“We are encouraged that the stake is to be sold at high valuations of CY20 P/E of 19.7x and price-to-AUM of 3.08%, which are above the average of 15.2x and 2.64% respectively, of past M&A [mergers and acquisitions] transactions involving asset management companies. We do not expect the bank to pay out the proceeds as special dividends but the increase in its CET1 (Common Equity Tier 1) capital ratio following the deal could raise its dividend payout in the longer term,” said Ng.

According to Hong Leong Investment Bank (HLIB) Research, AHAM's contribution to Affin Bank is 20% to 30%, and the loss of this part of the business could reduce the bank's ROE by 100 to 150 basis points (bps) in FY23.

“We understand Affin’s main intention is to plough back the sale proceeds to drive its core banking business. However, we think this is a slow way to plug the gap left by AHAM. Moreover, ROE would also be hit by the enlarged equity base, resulting from the RM1 billion disposal gain (estimated to be 40bps).

“Nevertheless, Affin did not rule out the potential for special dividends, which in turn can help to ease ROE pressure (we calculated every RM100 million payout or 2.6% dividend yield, may lift ROE by 4bps),” said HLIB’s analyst Chan Jit Hoong.

Separately, the analyst noted that the bank is also redeeming its RM1 billion medium-term notes (MTNs) that have a high coupon rate of 5.45%, translating to a cost saving of RM55 million.

“This move enhances ROE by 35bps. Taking into consideration the loss of income from AHAM, cost saving from the RM1 billion MTNs redemption, and enlarged equity base, we estimated the overall net negative impact to our FY23 profit forecast is 13%-24% while ROE may fall by 105-155bps,” said the analyst.

Ng said CGS-CIMB maintained its 'reduce' recommendation on Affin Bank as the research house sees higher credit risks for the bank compared to its peers — as the bank’s gross impaired loan (GIL) ratio of 3.14% at end-September 21 was higher than the industry's 1.57%.

“A potential de-rating catalyst is a wider increase in GIL ratio relative to its peers in 2022F. Furthermore, we expect the divestment of AHAM to reduce its FY23F fee income while any material increase in net interest income arising from the stronger capital of the bank may only be realised over the longer term.

“Our FY21-23F EPS forecasts and DDM (dividend discount model)-based target price of RM1.27 are intact pending the completion of the deal. We prefer Hong Leong Bank for exposure to Malaysian banks,” added Ng.

HLIB kept its ‘buy’ call on Affin with a target price of RM2.25, said Chan.  

“In our opinion, Affin’s risk-reward profile is still skewed favourably to the upside as the disposal of AHAM and the potential special dividends are re-rating catalysts. Essentially, monetising AHAM at a price-tag of RM1.4 billion would have in effect front load 10 years’ worth of its earnings, which is not a bad thing. 

“Also, Affin is left with a slew of business levers to explore despite the short-term ROE drag. Besides, from our reverse SOP (sum-of-parts) assessment, we calculated the market is only valuing its commercial banking unit at 0.27x P/B with c.3% ROE output (normalised ROE: 4%) vs peers 0.90x P/B with 9%-10% ROE, implying there is upside from current levels,” Chan added.

MIDF Research, on the other hand, is positive about the impact of the divestment on Affin's balance sheet, despite the apparent risks.

In MIDF's view, the focus on higher-potential corporate and municipal loan portfolios is a step in the right direction as Affin seeks to address its asset quality and underperforming ROE issues.

“The time frame in which it is able to rectify this, however, is less certain, though we expect more apparent changes by 2023. We maintain our ‘neutral’ recommendation with a higher target price of RM1.87 (from RM1.57), based on a pegging FY22F BVPS [book value per share] to 0.4x PBV [price-to-book-value]. We increase our PBV from 0.33x to consider a higher ROE outlook, as well as a much more favourable risk-reward profile,” said MIDF.

Kenanga Research maintained its 'market perform' rating on the bank and raised its target price to RM1.65 from RM1.55, saying the additional funds would strengthen the group's capital management. 

Although the above development would improve the group's medium-term performance, analyst Clement Chua said the research firm is waiting for visible short-term results given the bank's very ambitious plans, particularly to build a more sustainable long-term ROE.

“We are positive on this development, as it will help to materialise the group’s FY22 plans which we were previously sceptical about. Additionally, it is understood that the disposal will not be subject to the FY22 one-off prosperity tax, which is a relief to the group.

“The enlarged war chest could assist the group in growing market share in which it aspires to achieve RM90 billion loans book by FY25 (3QFY21: RM49 billion). While there are no promises on special dividends from this deal, we reckon that every RM100 million rewarded to shareholders would translate to an additional five sen dividend payment (2.8% yield),” said Chua.

At the time of writing on Monday (Jan 31), Affin Bank shares were trading down one sen or 0.56% at RM1.78, giving the bank a market capitalisation of RM3.78 billion. It saw 1.95 million shares traded.

Read also:
Affin Bank, selected shareholders sign deal to dispose of Affin Hwang AM stake to CVC’s Starlight Asset, confirms The Edge report
Affin Hwang Asset Management deal bumps up CVC Capital’s Malaysian investment to above US$1 billion