Published on 03 Aug 2020.
RAM Ratings has revised the outlook on AFFIN Bank Berhad’s (the Group) AA3 long-term financial institution rating (FIR) to negative from stable while maintaining its ratings. The negative outlook is similarly reflected in the ratings of the Group’s debt instruments as well as the FIRs of its core subsidiaries, AFFIN Islamic Bank Berhad (AA3/Negative/P1) and AFFIN Hwang Investment Bank Berhad (AA3/Negative/P1).
The change in rating outlook is premised on our view that the Group’s weaker-than-peer credit profile would be more susceptible to the adverse ramifications of the Covid-19 pandemic. AFFIN Bank’s gross impaired loan (GIL) ratio of 3.1% as at end-March 2020 (industry: 1.6%) was weighed down by its exposure to chunky corporate defaults. We remain wary of the possibility of other corporate loans turning impaired given the current economic turmoil and slump in oil prices. Furthermore, the Group’s residential mortgage portfolio has exhibited asset quality slippages in recent years, primarily stemmed from the self-employed segment and properties purchased for investment purposes (GIL ratio of 3.1% versus 2.4% as at end-December 2018; industry average: 1.2%).
AFFIN Bank’s ratings also incorporate our expectation that firm backing from its majority shareholder – Lembaga Tabung Angkatan Tentera (the Fund) – a government statutory body, will remain forthcoming in times of need. The Fund’s transformation plan which, amongst other measures, involves revamping its risk and governance structure under a new management, is expected to improve its financial health in the longer run.
AFFIN Bank turned in a flat pre-tax profit of RM682.5 mil in fiscal 2019 (fiscal 2018: RM679.1 mil) on the back of a narrowing net interest margin. While it benefits from a diversified earnings profile, underlined by AFFIN Hwang’s strong stockbroking and asset management operations, the Group’s earnings generation is still relatively muted compared to its banking group peers’. This is reflective of its weak deposit franchise and a high operating cost structure. We opine that the Group will experience further profitability pressures amid declining interest rates and heftier impairment charges. On this note, AFFIN Bank had beefed up its provisioning buffers in 1Q fiscal 2020, reporting an annualised credit cost ratio of 99 bps (fiscal 2019: 11 bps).
AFFIN Bank’s capital ratios are stronger following an initiative to shore up capital through a dividend reinvestment scheme and by reducing the concentration of chunky corporate loans which had caused its lending book to contract. The Group’s common equity tier-1 capital and total capital ratios were a notably better 14.3% and 23.1%, respectively, as at end-March 2020 (end-December 2018: 11.9% and 19.0%).
AFFIN Bank Berhad
AFFIN Islamic Bank Berhad
* combined limit of RM5 billion
AFFIN Hwang Investment Bank Berhad
Wong Yin Ching, CFA
(603) 3385 2555
(603) 3385 2577
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