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This article first appeared in Corporate, The Edge Malaysia Weekly, on April 18 - 24, 2016.

LAST year was a particularly tough one for Affin Holdings Bhd. The second smallest of the country’s eight banking groups, it saw a steep 38% decline in net profit to RM369.27 million and it missed all of its key financial targets.

The drop in its FY2015 net profit was mainly because of its high provisions for loan losses, which stood at RM188.38 million, and a 9.2% increase in operating expenditure due to integration and mutual separation scheme costs at its investment banking unit. It was the first time that Affin had to make substantial provisions after having enjoyed several years of writebacks on loan losses.

Affin’s management told analysts at the FY2015 results briefing last month that the provisions were high due to one-off provisions that it had to undertake mainly for government contract financing, and that they are unlikely to be repeated this year. Will things improve for the group this year?

Analysts say they see Affin finally returning to profit growth this year after two consecutive years of declines — net profit fell 8.8% in FY2014 — but they stress that the group is still in for a difficult year. The operating environment remains weak, and it does not help that Affin has one of the lowest net interest margin (NIM), return on equity (ROE) and deposit franchise among the local banks. Its cost-to-income ratio (CIR) is also one of the highest in the industry.

At the results briefing, Affin revealed that it is embarking on a new five-year transformation plan starting this year but did not provide details. They are expected to be disclosed soon. Analysts expect the group to shed more light at its annual general meeting on April 18.

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Bloomberg data shows that of at least nine analysts who track Affin, six have a “sell” call on the stock while two are “neutral” on it. Only one has a “buy” call. The average 12-month target for the stock is RM2.06. It closed at RM2.33 last Friday.

“As 2016 is expected to be a challenging year, management expects NIM compression to be unavoidable with competition for deposits to continue,” says Kenanga Research in a March 8 report.

Affin, which is 35.4% owned by Lembaga Tabung Angkatan Tentera, has seen a steady downtrend in NIM since 2011, falling from 2.25% that year to 1.93% in 2015, despite growth in its overall loan base. Its CIR stood at 60.2% in 2015, due to weaker revenue and higher opeating expenditure for Affin Hwang Investment Bank,  compared with just 46% in 2012.

On a positive note, however, Affin expects asset quality to improve this year. “While the operating environment will likely remain challenging, management expects its asset quality to improve — with credit cost guided lower to 20 basis points from 44 basis points in FY2015, and gross impaired loan (GIL) ratio to trend lower — as it believes the lumpy provisions incurred in FY2015 are non-recurring,” Hong Leong Investment Bank Research says in a March 8 report.

Affin’s GIL ratio stood at 1.9% as at end-December, which is higher than the industry average of 1.6%, but an improvement from 2.21% in September 2015. Its exposure to the troubled oil and gas sector is less than 2% of its total loan portfolio and the loans are performing, Affin told analysts.

The group plans to focus on growing its consumer loans this year as it seeks to balance its consumer and corporate loans. Last year, its consumer-to-corporate loan ratio was 45:55 and it wants this to reach 50:50 in two years’ time. “The focus will be more on bringing up its mortgage loans (FY2015: 15% of the portfolio) up to the industry ratio of 30%. On hire-purchase (HP) financing (28% of the portfolio), management will still focus on the non-national car segment, which makes up 80% of its HP portfolio, as it has better yields and is focused mainly on the high-income group,” says Kenanga Research.

Affin is expected to make a net profit of RM466.11 million this year, according to analysts’ consensus estimates. This would represent a growth of 26% over its net profit last year.

At the briefing, Affin guided that it expects loans to grow between 6% and 8% this year and deposits by around 5%. Analysts have a more subdued forecast of 6% and 4% respectively.

Last year, Affin missed all of its key targets. It had expected ROE of 8% but it came in at just 4.6%. Gross non-performing loan ratio came in at 1.9% instead of 1.64% and earnings per share was 19 sen instead of 33 sen.

“At 0.5 time book value, Affin is the cheapest bank in the industry. Nevertheless, we believe there is downside to the share price given its low ROE and persistent challenges to earnings growth,” says DBS Research in a Feb 29 report. It has a “fully valued” call on the stock and a target price of RM1.80.

 

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