Softer earnings growth seen for Affin Bank

This article first appeared in The Edge Financial Daily, on September 7, 2018.
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Affin Bank Bhd
(Sept 6, RM2.35)
Maintain sell with a lower target price of RM2.20:
Personnel costs for the first half of financial year 2018 (1HFY18) surged to RM403.2 million, accounting for 65% of total overhead expenses versus 60% a year ago. We understand that the bank had hired some 800 to 1000 new employees, most of whom would form sales teams to drive income. We also note that there were several senior positions filled over the past year to help acquire new customers for the bank and lead divisions such as consumer, small and medium enterprise (SME) and information technology (IT).

We gather that personnel costs could remain elevated as Affin Bank Bhd is still in a hiring mode till year end. Additionally, we foresee IT and digital spending to also increase as the group enhances its digital offerings for both the consumer (by end-2018) and business segments (in 2019).

As such, we raise our forecast for overhead expenses, which would then translate into a higher cost-to-income ratio of around 60% to 61% for FY18/FY19/FY20 from around 56% previously.

Gross credit cost rose to 22 basis points (bps) in 1HFY18 from 14bps a year ago. According to management, the bulk of the increase was spurred by a large corporate account in the oil and gas industry. We also note that restructured and rescheduled loans have accelerated due to some weakness in the real estate industry. Nevertheless, given that management is projecting higher gross credit cost of 30bps to 40bps from 22bps currently, we envisage the possibility of more asset quality deterioration in 2H.

Noting that the weakness could be broad-based, we continue to foresee the possibility of corporate-based asset quality worsening. High-risk sectors in which Affin Bank has exposure to include construction and non-residential properties. Tracking closer to management’s guidance, we raised our credit charge assumptions for FY18/FY19/FY20 to 34bps/30bps/28bps from around 25bps previously.

Adding to more pressures on earnings, we continue to envisage further net interest margin (NIM) compression. Competition for deposit is expected to remain intense in 2H. Particularly for Affin Bank, we believe that the bank’s digital offerings lack some of its peers’. This, we opine, has resulted in current account and savings account (Casa) deposits slipping 6.3% year-on-year (y-o-y) (versus Bank Negara Malaysia’s 4.1% y-o-y increase) and Affin Bank’s market share eroding to around 1.8% from 2% a year ago.

With the implementation of the new Net Stable Funding Ratio expected in 2019, we believe Affin Bank would have to shore up longer-term, stable sources of funding — from around 70% currently. This could result in a lift to the group’s cost of funds in 2H.

Additionally, we believe the 18bps decline in overall NIM for the group was premised on the bank aggressively growing its Islamic banking portfolio, which typically carries a lower profit margin compared with conventional loans.

Toning down expectations, we now foresee softer FY18/FY19/FY20 earnings growth of 0.8%/7.7%/9.8% for Affin Bank. While we remain sanguine over the group’s transformation efforts, we believe competition among other industry players will continue to intensify, stifling top-line growth.

On the digital front, with many of its competitors at more advanced stages in terms of their technology and digital offerings, Affin Bank’s Internet and Mobile Banking upgrades are important to help retain loyalty from its existing customer base, in our view. — TA Securities Research, Sept 6