The team at MIDF Research believes it provides Affin Bank with increased investment banking opportunities, given that its non-interest income hasn’t fully recovered from its disposal of AHAM.
KUCHING (Feb 7): From a fundamental perspective, the Sarawak government potentially being a new shareholder, vying for a 30 per cent stake, rather than the previously mentioned 20 per cent, is in line with Affin Bank’s current direction.
The team at MIDF Amanah Investment Bank bhd (MIDF Research) believes it provides Affin Bank with increased investment banking (IB) opportunities, given that its non-interest income (NOII) hasn’t fully recovered from its disposal of AHAM.
“It also provides Affin Bank opportunities to build up its SME and corporate segments, especially when the group is looking to move away from lower-yielding consumer loan segments,” it said in its analysis yesterday.
“At the same time, it’s important not to overstate the benefits brought about by these changes. Affin is still far too expensive for its valuation, 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.”
MIDF Research noted that the Sarawak government’s incentives in acquiring Affin Bank are very apparent. As alluded to by media reports, the Sarawak government intends to use Affin to boost the state’s financing of SME and business activities.
A large-scale, state-linked bank is crucial in ensuring the financing of development initiatives in Sarawak is well supported.
“The implication is different between a 30 or 20 per cent stake,” MIDF Research explained. “The change in proposed stake is significant as it determines who will be the largest shareholder at Affin Bank, and this could influence its future direction.
“We feel that a 30 per cent stake would make more sense from Sarawak government’s perspective – as the largest shareholder, it will be able to exercise significantly more control over the bank’s direction – in line with the state’s intention to provide the financing for the state development initiatives.
“It is also possible that it could have a higher stake, albeit via indirect means. Also, it should be stated that these are all subject to Bank Negara Malaysia’s approval.”
Recapping some of Affin’s near-term profitability headwinds and plans, its net interest margins (NIMs) has been underperforming as of late, likely due to a combination of a high lower-yielding loan growth and more competitive deposit rates to provide adequate liquidity.
“One of the core drivers of Affin’s abnormally high loan growth in the past few years was its heavy accumulation of lower-yielding consumer loans during the low-interest environment of the pandemic.
“As a result, Affin will be slowing down its loan growth, shifting its focus on selective higher-yielding segments. It will be shifting away from lower-yielding consumer loan segments (especially on residential mortgages, which have extremely competitive margins as of late) to higher-yielding business loans (as a means of NIM preservation).”
Meanwhile, MIDF Research noted that Affin is currently developing its IB franchise to replace AHAM’s former stable NOII contribution.
“Its asset quality outlook questionable, especially on business end. This will likely be accompanied by high (and possibly lumpy) credit charges,” it forewarned.
“Also, the group still struggles to keep its operating expenditure (opex) to a manageable level. This could increase further as the Group expands its regional presence.”
SME and corporate segments may potentially benefit – in line with the group loan portfolio rebalancing intentions. As alluded to in media reports, Affin will be able to support Sarawak’s business and SME growth.
Stronger growth of these SME and corporate segments is in line with Affin’s current direction improving asset yields and NIM profile.
“However, we still need to keep an eye on asset quality. Affin’s ability to be selective about larger projects depends on various factors,” it said. “Also, we need to be wary on possible ESG issues, especially if Affin’s loan exposure to oil and gas players increases without any mitigating factors.
“Other form of financing such as grants? These are usually used to stimulate nascent but strategic industries. These would be beneficial from a NIM and liquidity perspective.
“The effect on attractive consumer deposits is minute but still exists.”