Published on 29 Oct 2021.
RAM Ratings has reaffirmed the AA3/Negative/P1 financial institution ratings of AFFIN Bank Berhad (AFFIN Bank or the Group) and its banking subsidiaries, AFFIN Islamic Bank Berhad and Affin Hwang Investment Bank Berhad.
The negative outlook reflects our concerns over AFFIN Bank’s weaker-than-peer loan quality and profitability metrics, which will remain under pressure amid prevailing Covid-19-related uncertainties. Current challenges in the operating environment could hamstring the recent traction that AFFIN Bank has gained in improving its credit fundamentals. We may revert the rating outlook to stable if these turnaround efforts continue to result in sustainably better underlying asset quality while also improving its earnings generation and funding profile.
The ratings remain supported by AFFIN Bank’s sound capitalisation (common equity tier-1 capital ratio of 14.0% as at end-June 2021) and support from its ultimate shareholder, Lembaga Tabung Angkatan Tentera (LTAT). We expect LTAT to stay committed to safeguarding the Group’s financial standing, given that it is a strategic and core investment of the former. LTAT has demonstrated support in the past through capital injections, subscription of capital securities and the reinvestment of dividends.
Since the new management took office last year, measures have been taken to shore up AFFIN Bank’s risk controls including tightening underwriting standards and enhancing collection strategies while staying the course in right sizing its corporate loan book. The impact of these corrective actions has started taking hold as reflected in improved delinquency trends, particularly for its housing loan portfolio. Along with partial repayments of some large impaired accounts, the Group’s latest gross impaired loan (GIL) ratio eased to below 3% (end-December 2020: 3.5%). This metric however is still higher than the industry’s 1.7% as at end-August 2021, largely due to impaired corporate loans originated in the past. The Group’s susceptibility to chunky GILs will remain a headwind to its asset quality.
About 28% of total lending was under relief as at end-August 2021, broadly in line with other banks’. AFFIN Bank’s credit costs soared to 104 bps in FY Dec 2020 (FY Dec 2019: 11 bps), staying lofty at an annualised 46 bps in 1H FY Dec 2021, as it continues to fortify provisioning reserves. GIL coverage is now above 60% (end-December 2019: 42%) although still lower than peers’. Including regulatory reserves, the ratio would be about 110% (end-December 2019: 95%), bringing it closer to the industry average of 129% as at end-June 2021. Although the Group will be accommodative in extending further relief to its borrowers when the government-led opt-in moratorium gradually unwinds in 1H 2022, some defaults may begin to surface. We believe that its sturdier loan loss absorption capacity and tightened risk management practices will help moderate credit risk on this front.
Dented by heavy provisions and a RM78 mil modification charge, AFFIN Bank’s pre-tax profit fell 42% to RM394.2 mil in FY Dec 2020 and resulted in a modest return on risk-weighted assets of 0.8% (FY Dec 2019: 1.4%). On a brighter note, its net interest margin saw an upswing last year – bucking the industry trend. Margins grew 5 bps to 1.73% and broadened further to 1.94% (annualised) in 1H FY Dec 2021 thanks to lower funding costs. This and the absence of sizeable modification losses lifted pre-tax profit by 5% y-o-y to RM284.1 mil despite still-lofty credit costs and softer trading gains. Overall profitability will however stay under provisioning pressure. The Group has made encouraging progress in improving its deposit gathering capabilities, although they still lag behind its peers’. Further improvement in its funding profile will take time.
We have also reaffirmed the ratings of debt securities issued by AFFIN Bank and AFFIN Islamic Bank Berhad while retaining the negative outlooks on the ratings (Table 1).
Table 1: AFFIN Bank group issuer and issue ratings
Chow Kah Mun
(603) 3385 2501
Wong Yin Ching, CFA
(603) 3385 2555
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Rating Rationale: AFFIN Bank Berhad
Rating Rationale: AFFIN Islamic Bank Berhad
Rating Rationale: AFFIN Hwang Investment Bank Berhad
Ratings on AFFIN Bank Berhad