AFFIN HOLDINGS BHD’S unexpected surge in loan loss provisions in the first quarter, which led to its net profit falling 79% year on year, are related to a corporate loan that’s secured against a property, says a source familiar with the matter.

“It has nothing to do with 1Malaysia Development Bhd or any government-linked company,” the source tells The Edge, quashing market speculation that the provisions may have been related to the group’s loan exposure to the beleaguered state-owned strategic development fund.

The source, however, declines to be more specific about the corporate loan. He also declines to reveal the size of Affin’s total exposure to 1MDB, indicating however that it isn’t sizeable given that Affin is relatively small, as would be its single customer limit.

Affin (fundamental: 1.10; valuation: 2.25) caught analysts off-guard when it made what it termed a “one-off” loan loss provision to the tune of RM124.1 million in the quarter ended March 31, 2015 (1QFY2015) — the highest quarterly provision the group has ever made since the fourth quarter of 2005 — at its banking unit, Affin Bank.

The move resulted in the country’s second smallest banking group turning in a first-quarter net profit that was way below expectations. At RM30.1 million, not only was the 1Q2015 net profit an 86% drop from that in the preceeding quarter, it accounted for a mere 5% of analysts’ consensus forecast for the full year.

Affin’s stock fell to a year-to-date low of RM2.74 last Friday. It has shed 5.5% since the results were announced on May 20.

Investors are worried there could be more large provisions in the offing, and wonder if the group can meet its FY2015 aspirations, which include an after-tax return on equity (ROE) of 8%, earnings per share (EPS) of 33 sen, and a gross impaired loan ratio (GIL) of 1.64%.

Its ROE stood at just 0.4% in the first quarter, the lowest of all the local banking groups, while EPS was just 1.55 sen. Its GIL worsened to 2% compared with 1.8% in the preeceeding quarter, while loan loss coverage declined to 68% from 75.6%.

Analysts say it doesn’t help that Affin’s management has yet to meet them to shed more light on the corporate loan that it had to make provisions for.

The source, however, tells The Edge that the large provisions in the first quarter were really a one-off event and that the second quarter should see the group getting back on track as per past quarters.

“This is only one specific corporate account that has been with the bank for quite some time, and the provision is a one-off event. Affin had to impair and make provisions for it, but all is not lost as it’s hoping to make recoveries by the end of the year. The loan is secured against a property and Affin is looking at how to get the best value out of this collateral,” the source says, adding that a receiver and manager have been appointed for that purpose.

“Affin felt it was better to impair, take a hit, but it’s working to recover part of it,” the source adds.

The source says the second quarter should see Affin getting back on track with a profit before tax (PBT) of between RM150 million and RM175 million as per in the last few quarters prior to 1Q2015. PBT in 1Q2015 was just RM48.55 million.

Affin, in a press release after the first-quarter results, however, did warn that the rest of the year would be just as challenging, with competition from rivals expected to be stiff. It also noted that global issues such as volatility in the oil price and depreciation in currency was creating uncertainties among businesses.

Several analysts have lowered their full-year earnings forecast for Affin.

“While 2015 will see the first full-year consolidation of (Affin’s) Hwang Investment Bank acquisition, we expect asset quality to hog the spotlight instead, following the deterioration noted in 1Q2015 results,” RHB Research said in a May 21 note to clients. The research house cut its FY2015-FY2017 net profit forecasts for Affin by 12% to 25%.

The source, when asked about Affin’s asset quality going forward, says while it is uncertain whether its GIL and non-performing loan ratio would improve by the year-end, it should at least return to the level seen in Q4FY2015.

Affin’s performance in 1Q2015 was dismal in other areas as well. Its loan base fell by 1% quarter on quarter, its net interest margin fell by about 15 basis points due to higher funding cost and its cost-to-income ratio (CIR) rose to 61.4% from 52.3% due to weak income growth.

Non-interest income, however, was up 6% q-o-q due to the consolidation of the HwangIB acquisition, helped by stronger gains from sale of investments and higher forex income. Capital markets, however, remain weak and, as such, even though the enlarged investment bank is sizeable enough to better compete for deals, activities are slow.

Affin is currently going through an internal reorganisation following the entry of its new group CEO, Kamarul Ariffin Mohd Jamil, in April this year. Ariffin replaced Datuk Zulkiflee Abbas Abdul Hamid, who retired. “Affin is streamlining some of the functional organisational structures,” the source says.

Kamarul was previously the CEO of Affin Islamic Bank, rising through the ranks since joining Affin Bank as the head of corporate strategy in 2003.

Last week, Affin appointed Nazlee Khalifah as the new CEO of Affin Islamic. Hewas previously the group's chief corporate strategist.

This article first appeared in The Edge Malaysia Weekly, on June 8 -14, 2015.

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