KUALA LUMPUR (Aug 23): Affin Bank Bhd (KL:AFFIN) flagged that margin could continue to narrow in the short term while the lender grappled with shrinking deposits amid intense competition.

Net interest margin — a measure of profitability from interest charged on loans after paying returns on deposits — is expected to compress as the bank focuses on “higher credit quality clients given the soft economics conditions”, said chief executive officer Datuk Wan Razly Abdullah.

“The group aims to optimise our operational cost structure and cost of funds while delivering innovative customer solutions to meet evolving expectations,” he said in a statement.

Banks in Malaysia have been grappling with pressure on their net interest margin amid intense competition for deposits in a market where three dozen foreign and local lenders jostle for business.

Lenders also have to maintain comfortable levels of deposits and other buffers to support loan growth in an economy expected to accelerate this year.

Affin is betting on the entry of Sarawak state as a shareholder, which could provide a “quantum shift” with access to a large number of customers and deposits. “The group’s presence in Sarawak will be amplified by the end of 2024,” said Wan Razly.

On Friday, Affin reported that its net profit edged up 4.7% year-on-year in the second quarter, thanks largely to writeback of impairment losses that helped offset a decline in income.

Net profit for the three months ended June 30, 2024 (2QFY2024) was RM118.58 million, compared with RM113.23 million in the same quarter last year, Affin said in an exchange filing. Net interest income fell 8% year-on-year to RM170.26 million, while non-interest income fell 29% to RM31.83 million.

Net interest margin fell to 1.40% in April-June 2024 (2QFY2024) compared to 1.44% in the preceding three months while its cost of funds rose to 3.37% from 3.34% in 1QFY2024. Deposits from customers meanwhile fell 0.7% quarter-on-quarter.

Affin’s gross loans expanded 1.4% quarter-on-quarter and 10.5% year-on-year. “We expect moderate loan growth in 2024 due to global geopolitical tensions and elevated inflation,” the bank said.

For its first six months, net profit slipped 13% to RM228.79 million from RM262.21 million over the same period last year. Net interest income was 11% lower at RM336.05 million though non-interest income rose 10% to RM144.93 million.

In terms of asset quality, Affin’s gross impaired loan — debts deemed unrecoverable as a percentage of total loans — edged up to 1.89% from 1.78% at the end of June 2023. Loan loss coverage was at 100.06%.

The common equity tier 1 capital ratio — a measure of a bank’s capital strength based on the highest quality of regulatory capital — declined to 12.84% from 14.11%.