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AFFIN Bank’s AA3/P1 ratings reaffirmed; outlook revised to negative

Published on 03 Aug 2020.

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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%).
 

Table 1: Ratings of entities under AFFIN Bank

 

Ratings

AFFIN Bank Berhad

  1. Financial Institution Ratings
  1. RM6 billion Medium Term Notes Programme
  • Senior Notes
  • Subordinated Notes
  1. RM3 billion Additional Tier-1 Capital Securities Programme

 

AA3/Negative/P1

 

AA3/Negative

A1/Negative

A3/Negative

AFFIN Islamic Bank Berhad

  1. Financial Institution Ratings
  1. RM5 billion Islamic Medium Term Note Programme
  • Senior Sukuk Murabahah*
  • Tier-2 Sukuk Murabahah*
  • Additional Tier-1 Capital Sukuk Wakalah*

* combined limit of RM5 billion

AA3/Negative/P1

 

AA3/Negative

A1/Negative

A3/Negative

AFFIN Hwang Investment Bank Berhad

  1. Financial Institution Ratings

 

AA3/Negative/P1

 

 

Analytical contact
Wong Yin Ching, CFA
(603) 3385 2555
yinching@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2020 by RAM Rating Services Berhad

 



Rating Rationale: AFFIN Bank Berhad

Rating Rationale: AFFIN Islamic Bank Berhad

Ratings on AFFIN Bank Berhad

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