KUALA LUMPUR (Sept 30): Analysts foresee a substantial rise in deposits at Affin Bank Bhd (KL:AFFIN) after the Sarawak government raised total ownership in the bank to 31%, becoming its largest shareholder.

"We anticipate a rise in CASA (current account and savings account) deposit contributions and are upgrading our fair value estimate to RM4.30 from RM4.00 ," CIMB Securities said in a note on Monday, while maintaining a “buy” recommendation.

Despite no major deposit contributions from the Sarawak government over the past year, CIMB Securities now anticipate new CASA potential of at least RM4 billion in FY2025, enabling the release of more expensive fixed deposits.

TA Securities echoed this optimism, highlighting the strategic advantages Affin Bank gains through the Sarawak government's latest stake acquisition.

It noted the state’s economic prospects and its role as a key economic catalyst in Malaysia.

"As the financing vehicle for the Sarawak government, Affin Bank is ideally situated to capitalise on the state's growth potential," TA Securities noted, pointing to opportunities in advisory roles, loan growth and infrastructure projects.

Additionally, the anticipated salary increase for Sarawak's civil servants could significantly boost the bank's CASA deposit base.

Affin Bank is also poised to benefit from the Sarawak-Malaysia My Second Home Programme, attracting affluent foreign residents.

The programme is expected to see a notable rise in applicants, presenting a valuable opportunity for Affin Bank’s wealth management division.

With Sarawak’s projected revenue increase and the government's growing involvement, analysts foresee a bright future for the bank's business segments.

On challenges ahead, TA Securities notes that Affin Bank could face near-term cost pressures as it enhances its digital capabilities and expands its physical presence in Sarawak.

The bank is aiming to reduce its cost-to-income ratio from 71.6% in FY2023 to 64%, requiring strategic investments in technology and branch infrastructure.

TA Securities remained cautious in keeping its “sell” recommendation due to Affin's steep share price rise.

While MIDF agreed that the increased stake by the Sarawak government will impact deposits, Affin's current valuation is deemed unattractive.

"We believe that Affin is still overvalued at [the] current juncture, given the multiple headwinds it faces in the near future. We feel that benefits brought about by a new shareholder will take some time to manifest," stated MIDF.

The benefits from the new shareholder are expected to take time to manifest, and Affin is currently trading at approximately 0.6x price-to-book value ratio (P/BV), which is well above its five-year historical average of 0.34x.

MIDF suggested that Affin should be trading within the 0.40-0.45x P/BV range, given its likely return on equity (ROE) range of 4-5% in the near future.

The Sarawak government's incentives in acquiring Affin Bank are clear, aiming to boost state financing for SME and business activities. A state-linked bank is crucial for supporting development initiatives in Sarawak.

However, MIDF believes that Affin's current valuations are unattractive due to its low ROE-generating potential. Despite the potential re-rating from the new major shareholder, the bank’s share price appears to have moved ahead of its fundamentals, MIDF said, as it maintained its “sell” recommendation with a revised Gordon growth model-derived target price (TP) of RM 2.35, up from RM1.82.

The TP is based on a revised FY2025F P/BV of 0.45x, reflecting the potential re-rating following the entry of Affin Bank’s new largest shareholder.

MIDF highlighted key downside risks such as persistent asset quality issues, steep net interest margin compression, and weak non-interest income performance. Its forecasts remained unchanged, with core NP expected to grow by 8% in FY2024F, 10% in FY2025F, and 10% in FY2026F.

At the time of writing, Affin Bank’s shares were down nine sen or 3.1% at RM2.86, valuing the banking group at RM6.9 billion.