Affin Hwang Capital to focus on domestic growth

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NEWLY formed Affin Hwang Capital Bhd’s (AHC) growth over the next five years will be very much centred on Malaysia as it focuses on four existing core businesses and adds a fifth — wealth management (WM) — in two years’ time.

AHC, the result of a merger between Affin Investment Bank Bhd and HwangDBS Investment Bank Bhd back in April, runs four businesses currently — investment banking, asset management (AM), securities and treasury. The group, owned by Affin Holdings Bhd, started its first official day of operations last week, on Sept 22. 

“Eventually, in two years, we should have WM. So, these five will form the core businesses of AHC,” Teng Chee Wai, managing director of AHC’s AM management business, tells The Edge in his first interview since the merger.

Interestingly, its domestic-focused strategy is unlike most investment banking groups in Malaysia that are increasingly looking abroad, particularly to Asean, for growth. 

Teng however says the group, led by group managing director Maimoonah Hussain, believes there is still plenty of room to grow in Malaysia, especially in the AM space, and as such, sees no urgent need to venture abroad for now. 

“We do set ourselves some ambitions, some thought process of expanding beyond Malaysia, but we’re cautious about rushing into something. When you go abroad, you are just another player ... there’s no advantage to your brand name. You need to build up your core expertise first.

“So, we want to build scale in Malaysia first. It doesn’t mean we won’t [go abroad], but there’s no burning desire to do it. We are still very much going to be home-grown and there is still enough growth for us in the domestic market,” he remarks.

AHC can always tap the overseas market through collaborations with foreign players, he explains. For example, late last year, Affin Investment Bank inked a strategic agreement with Japan’s Daiwa Securities Group Inc for an equity trading collaboration.

At home, one of the key ways it plans to grow is by focusing on cross-selling opportunities within the group’s various businesses. AHC’s ambition over the next five years is for each of its core businesses to be among the top five in their respective industries. “For AM, in particular, we’d like to be top three in the industry,” says Teng. 

Its upcoming WM business will largely focus on high net worth individuals — those with a minimum RM3 million of assets. 

Teng: There is still enough growth for us in the domestic market

“Today, of our close to RM30 billion of assets under management, we have about RM1.5 billion of assets from high net worth individuals, so we thought it would be good to spin it off and create a WM business by itself that’s very focused on their needs and requirements. But we don’t see the need to rush into it. We’re taking our time to understand the market and build the necessary technology platform and so on,” he says.

The group aspires to grow its total assets under management, including WM and the Islamic assets under wholly-owned Asian Islamic Investment Management Sdn Bhd, to about RM50 billion by 2018 from close to RM30 billion now. 

Around 10% of that, or about RM5 billion, would hopefully be high net worth assets, says Teng, who started HwangDBS’ AM business 14 years ago. AHC’s AM business is currently the fifth largest by assets among the private players in the country. 

Teng says it is important for the company to scale up the business. “You need scale to run the margins. Over the years, costs have doubled but revenue per AUM (assets under management) has not increased — in fact, it has been on a declining trend. So, the only way to grow is to scale up.”

However, there are no plans to scale up via acquisitions. “If you look at WM in Malaysia, there are probably only two players or so that focus on high net worth clients. So, we’re not going to acquire other firms, we’re going to build on the strengths that we have internally. Where we are still lacking is in the product pipeline. We’re targeting onshore ringgit assets.” 

Teng is optimistic that being under the Affin Holdings group, the government-linked company (GLC) segment of the AM business will at least double in five years. “We believe the GLC segment is a growth segment for us. Our GLCs today contribute about RM8 billion to our assets and we think by 2018, it should increase to RM16 billion to RM18 billion,” he says.

All four of AHC’s current businesses are profitable, although the securities business faces intense margin pressure. The investment banking operation is the most profitable, followed by AM, says Teng. 

Affin Holdings, which consolidated HwangDBS’ earnings into its results in the second quarter, reported an almost 30% drop in net profit that quarter to RM112 million, coming in below analysts’ expectations.

HwangDBS’ contribution of RM25.4 million to the group’s profit before tax of RM161.7 million that quarter had been offset by finance costs of RM16.5 million as well as transaction and integration costs of RM9.6 million related to the merger, analysts say.

“This year, there’ll be more integration costs coming in, but once that’s behind us, the contribution growth should be positive,” Teng says, adding that he is not at liberty to project future contributions by AHC to Affin Holdings. 

The merger was meant to create revenue synergies rather than cost synergies, with a projection of RM32 million in revenue synergies cumulatively over the next three years at the profit before tax level, he says. 

He reveals that AHC’s clients and staff have responded well to the merger and that the staff attrition rate has been “very low”. “Most of our clients have been very supportive, especially in AM. There has been no major disruption in business, neither have we seen our market share decline since [the merger in] April.”

He says the major integration work has already been done and should be fully completed by June or July next year, when all 1,500 staff will be housed in one building — Menara Boustead in Jalan Raja Chulan, Kuala Lumpur. AHC currently operates in Menara Keck Seng in the Bukit Bintang area. There are no plans to reduce staff in the AM business, he adds.

He claims the two different cultures have so far meshed well. “If you look at the brand we have created, AHC, it carries four identities. The first two — discipline and collaboration — reflects the strengths of Affin, while the other two — pioneering and entrepreneurship — reflect the Hwang identity. We have focused on the strengths of the two cultures coming together.

“Over the next two to three years, I’m very confident that we’ll come through as a very exciting brand that will probably surprise the market from thinking that it’s another sleepy thing. If you look at Affin, sometimes it was viewed as being sleepy, very quiet — I think you’ll now hear a lot more about us.”

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.