Published on 05 Jul 2019.
RAM Ratings has reaffirmed the AA3/Stable/P1 financial institution ratings of AFFIN Bank Berhad (the Group). Concurrently, we have reaffirmed the respective AA3 and A1 ratings of the senior and subordinated notes under the Group’s RM6.0 billion MTN Programme as well the A3 rating of its RM3.0 billion Additional Tier-1 Capital Securities Programme. The issue ratings also have a stable outlook.
The ratings incorporate our expectation of extraordinary support from AFFIN Bank’s majority shareholder, Lembaga Tabung Angkatan Tentera (the Fund), a government statutory body established to provide retirement and welfare benefits to the Malaysian armed forces. From our recent engagement with the Fund, we believe it remains committed to providing support to the Group. The Fund is in the midst of strengthening its risk and governance structure under a new management, which is anticipated to improve its financial health in the long run.
The ratings also consider AFFIN Bank’s satisfactory loss absorption buffers in the form of its capitalisation and loan loss coverage (including regulatory reserves). These are expected to sufficiently cushion the Group against asset quality deterioration as a result of lumpy impairments. Moderating the ratings, however, are the Group’s weak profitability and relatively small market share domestically.
AFFIN Bank’s loan book expanded by 6.3% in fiscal 2018 (fiscal 2017: +4.3%), largely attributable to residential mortgages. In line with the Group exiting some low-yielding and chunky corporate loans in the last few years, its corporate book further contracted in 1Q fiscal 2019, causing loans to decline 0.9% q-o-q.
The Group’s asset quality is still vulnerable to lumpy impairments, as a result of which its gross impaired loan (GIL) ratio climbed to 3.3% as at end-March 2019 (end-December 2017: 2.5%). Nonetheless, Affin Bank’s credit cost stayed relatively low at 14 bps in fiscal 2018 (fiscal 2017: 16 bps), given the largely collateralised nature of the accounts. Its GIL coverage ratio (including regulatory reserves) remained sufficient at 95.9% as at end-March 2019.
While the observation period for the impending net stable funding ratio (NSFR) regulation has been deferred to 2020, the Group intends to embark on several initiatives to reach the required 100% target. These efforts include the issuance of senior sukuk as well as the securitisation of its mortgage portfolio to Cagamas Berhad, although the Group’s primary focus is to grow its retail and SME deposits. AFFIN Bank’s fixed deposits demonstrated aggressive growth of RM9.7 billion collectively in fiscal 2018 and 1Q 2019. As such, funding costs are expected to remain elevated, consequently compressing margins going forward. AFFIN Bank’s return on risk-weighted assets of 1.4% in fiscal 2018 is still among the lowest in the industry, constrained by high operating expenses and thin margins, although AFFIN Hwang Investment Bank Berhad contributes a healthy non-interest income.
As at end-March 2019, the Group’s common equity tier-1 capital ratio stayed sound at 12.4% (end-December 2017: 12.2%) upon the completion of a dividend reinvestment exercise. AFFIN Bank’s total capital ratio rose to 20.8% as at the same date (end-December 2017: 17.2%) due to the issuance of additional tier-1 capital securities and subordinated sukuk.
Liang Huey Jean, CFA
(603) 3385 2495
(603) 3385 2577
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Ratings on AFFIN Bank Berhad