This article first appeared in The Edge Malaysia Weekly on November 13, 2023 - November 19, 2023
Affin Bank Bhd has been keeping busy streamlining operations to build its “house of tomorrow”. Having completed its divestment of asset management arm Affin Hwang Asset Management Bhd in 2022, this year, it went on to complete the disposal of a 21% stake in Generali Life Insurance Malaysia Bhd (formerly known as AXA Affin Life Insurance Bhd) and the disposal of 2.95% equity interest in Generali Insurance Malaysia Bhd (formerly known as AXA Affin General Insurance Bhd).
The divestment of its asset management arm boosted the banking group’s earnings for the financial year ended Dec 31, 2022 (FY2022), with net profit doubling to RM1.18 billion from RM526.93 million in FY2021. Gains from the sale came up to RM1.075 billion for FY2022. Dividend per share was 30.39 sen for FY2022, compared with 12.5 sen in FY2021.
Shored up by divestment gains, the banking group’s risk-weighted three-year net profit showed a 37.5% compound annual growth rate (CAGR) from just RM487.8 million in FY2019. With most peers having single-digit annual growth over the same period, Affin Bank wins The Edge Billion Ringgit Club corporate awards for the highest growth in profit after tax over three years in the financial services sector among firms with a market capitalisation of below RM10 billion.
It is worth noting that the banking group has also shown its resilience during the period in review. In FY2019, net profit amounted to RM487.77 million. It slid to RM230.32 in FY2020 due to the Covid-19 pandemic but quickly bounced back to RM526.93 million in FY2021.
Without the divestment, FY2022 net profit would have been RM334 million, according to Hong Leong Investment Bank Research. Analysts note that the banking group’s year-on-year loan and deposit growth have stayed firm in FY2022 at 15.4% and 10.5% respectively. Meanwhile, its gross impaired loan (GIL) ratio has also decreased to 1.97% compared with 2.54% in FY2021, which the banking group credits to strong recovery efforts and tighter underwriting standards in its FY2022 annual report.
The closing of FY2022’s financial year also marked another chapter for the banking group as it embarks on a new mid-term strategic plan dubbed as the “A25 Transformation Programme” with ambitious targets to achieve by the end of FY2025.
Among the key financial targets that the banking group seeks to achieve by FY2025 are a profit before tax of RM1.5 billion, a current account, savings account (CASA) ratio of 30%, return on equity (ROE) of 10%, GIL of 1.5% and cost-to-income ratio of less than 53%.
For 1HFY2023, Affin Bank recorded a net profit of RM262.21 million, a 9.4% decline from the RM289.59 million achieved in the same period the year before, even as a contraction in net interest margin (NIM) led to a 10.8% year-on-year decline in net interest income.
According to CGS-CIMB Research, Affin Bank’s 2QFY2022 NIM was partly shaved off by the double interest payment for its additional Tier-1 capital securities.
“As this will not recur in the coming quarters, and we anticipate the deposit competition to subside, we expect Affin Bank to see a h-o-h (half on half) recovery in NIM in 2H2023F. This is supported by the bank’s guidance for NIM of 1.86% in FY2023F,” it says.
Meanwhile, RHB Research highlighted that its year-to-date (YTD) loan growth of 5% was behind the bank’s target of 12% for FY2023, but added that its existing loan pipeline appears to be healthy. Deposits grew 10% YTD, thanks to placements from government agencies and business enterprises.
“The launch of the bank’s mobile application in September should help its CASA gathering efforts, which is positive for the long-term trajectory of NIM,” says the research house.
However, RHB Research did mention that the banking group’s management raised its year-end GIL ratio target to 2% from 1.9% earlier, as it is seeing some early signs of stress of its books in the mortgage, real estate and manufacturing sectors.
Despite the less optimistic outlook, RHB Research still has a “buy” call on the bank at the time of writing. It lowered its target price to RM2.20, on account of a 2% cut in its forecast FY2023-FY2025 earnings, which factored in a sharper NIM squeeze.
“We continue to like Affin for its undemanding valuation and solid long-term growth strategies, which include its expansion into Sarawak,” it says.
Noting that the counter is supported by a dividend yield of 4.6% for FY2023, CGS-CIMB Research also maintained its “add” call and RM2.26 target price on the bank, on account of its attractive valuation with a forecast FY2024 price-earnings ratio of 7.9 times and forecast FY2023 price-to-book value of 0.4 times.
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