AFFIN Holdings Bhd’s earnings were far from impressive in the financial years ended Dec 31, 2014 (FY2014) and FY2015. Net profit shrank in both years due to impairments and fewer writebacks.
Profit before tax and zakat by activity from commercial banking contracted to RM461 million in FY2015 from RM720 million in FY2014 and RM762.2 million in FY2013.
Meanwhile, the investment banking division’s profit before tax and zakat declined to RM60 million in FY2015 after a minor jump from RM85 million in FY2013 to RM89 million in FY2014.
Despite the volatile earnings, the banking group’s deputy chairman, Tan Sri Lodin Wok Kamaruddin, is happy with the performance. He says the company’s second largest shareholder, Boustead Holdings Bhd, has no plans to sell its 20.69% stake in it, at least not for now.
Lembaga Tabung Angkatan Tentera is the banking group’s largest shareholder with a 35.42% stake. Lodin is Boustead Holdings’ managing director and the chief executive of LTAT.
“I am not sentimental ... if someone offered 10 times book value, certainly I will [sell] but there is no immediate plan to sell,” he tells The Edge.
Lodin says Affin Holdings has come a long way since he joined its board in the mid-1980s, adding that it has been through two severe economic downturns.
The bank is in a “much better shape” today than during the 1984/85 recession and the 1997/98 Asian financial crisis. “When I joined the board, there were all kinds of horror stories,” he says in an interview, adding that at the peak of the Asian financial crisis, Affin Holdings’ non-performing loans hit a high of 25% of total gross loans.
“[So] I don’t expect the bank to be impacted too badly [now] despite the decline in the economy,” says Lodin. “It is not like 1997 [when] we were among the worst-hit because of our huge exposure to some of the big corporate groups.”
In terms of asset quality, Affin Holdings’ gross impaired loans stood at 1.98% as at June 30, lower than that of its larger peers, such as CIMB (3.2%) and RHB Bank (2.06%), and higher than that of AMMB Holdings (1.69%) and Public Bank (0.52%).
Nonetheless, Affin Holdings’ earnings improved in the first six months ended June 30, 2016 (1HFY2016). Its profit margin widened with revenue growing 2.9% year on year to RM903.64 million and net profit surging 49.3% to RM252.96 million.
The banking group attributed the improved results to lower allowance for loan impairment, higher net interest income and better performance of its Islamic banking division, among others.
However, the higher earnings have done little to prop up Affin Holdings’ share price, which is hovering at a five-year low. The stock has dropped almost 7% year to date and is trading at half its book value, which stood at RM4.42 on June 30.
While saddened by the stock’s undervaluation, Lodin notes that other local banks are in the same boat.
“It is unfortunate that the market price today does not reflect the true value of the stock but we believe there will be recovery [in the valuation],” he says.
According to Kenanga Research’s valuation in early September, Affin Holdings’ price-to-book ratio of 0.5 times was the lowest among those of its peers, which ranged from 0.8 to 2.4 times at the time.
Some analysts attribute the banking group’s better 1HFY2016 results to a strong 1QFY2016, which offset the margin squeeze seen in 2QFY2016. Naturally, they are sceptical that Affin Holdings can sustain its financial performance over the longer term.
Of the eight research houses covering the banking group, four have a “sell” call on it and two have a “buy”. That said, banking stocks generally fall out of favour when the economic climate is harsh and capital requirements increase.
On whether there will be another round of consolidation in the banking sector, Lodin says he does not feel there will be much pressure from the government or Bank Negara Malaysia this time around. He believes market forces will determine the number of banks to operate in the country.
“It all depends on whether you [as an investor] have the stamina to hold on to your investment and whether you can sustain yourself over the medium to long term. These will be the two factors that determine if we are going to have five, six or eight banks.”
Moving forward, Lodin says Affin Holdings will focus on innovations in the financial technology (fintech) sector, which he believes is where the future of banking lies.
“We cannot run away from the digital economy. That will come. It may take 5 to 10 years, and it will make the bank more efficient. But the issue here is that some bankers will lose their jobs.”
Another frontier for Affin Holdings is China’s Islamic banking potential, says Lodin, adding however that the move is on hold now because Chinese regulators have not opened up to Islamic banking yet.
In 2010, reports said Affin Holdings and its 23.5% shareholder, The Bank of East Asia Ltd (BEA), had submitted a proposal to open China’s first Islamic bank. BEA chairman and CEO David K P Li was quoted as saying that the China Banking Regulation Authority was studying the proposal.
“Once the Chinese allow foreign Islamic banks to operate in their country, then BEA and Affin can work together to tap the market’s advantages,” says Lodin. “BEA is a fantastic partner to have … we understand each other very well.”
BEA holds a 23.5% stake in Affin Holdings.
However, banking analysts say a move into China is unlikely to happen in the near term. One says China is an obvious choice in the region, alongside Indonesia, for Islamic banking expansion but it will not be easy.
“China may not have a proper Islamic banking (framework) yet,” says the analyst. “So this [expansion] may take longer to materialise.”
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