Published on 14 Nov 2022.
RAM Ratings has revised the outlook on AFFIN Bank Berhad (the Group) and its banking subsidiaries to stable from negative while reaffirming the AA3/P1 financial institution ratings of the entities.
The outlook revision reflects AFFIN Bank’s better-than-expected asset quality trends, having weathered the recent pandemic relatively well. We expect the Group’s strengthened loss absorption buffers and earlier efforts to tighten underwriting to help cushion potential asset quality deterioration that could arise in the near term.
Strong recoveries aided by aggressive collection efforts coupled with disciplined underwriting led to the improvement in underlying asset quality, particularly that of AFFIN Bank’s corporate and home financing portfolios. As at end-June 2022, the Group’s gross impaired loan (GIL) ratio fell to 2.3% (end-December 2020: 3.5%), narrowing the asset quality gap with the industry (GIL ratio of 1.8%). While the ratio is partly skewed by recent high loan growth, the absolute amount of GILs notably declined (-23% from end-2020 level) even as loan relief measures were unwound. Most borrowers that exited repayment assistance this year have demonstrated healthy repayments.
Besides macroeconomic challenges posed by rising inflationary pressures and slowing global economic growth, we continue to monitor AFFIN Bank’s recent double-digit credit growth, still-sizeable related-party exposures, and corporate loans that remain under relief. While some of these risks may crystallise over the next one to two years, we expect asset quality indicators to stay better than previous levels.
AFFIN Bank completed the sale of its 63% interest in Affin Hwang Asset Management Berhad (AHAM) – one of Malaysia’s top fund managers – in July 2022. The sale will result in the loss of a stable fee-based income stream and a less diverse business profile. These factors are however balanced by the stronger loss absorption capacity afforded by RM1 bil of divestment gains. Part of the funds will be used to beef up the Group’s traditionally low GIL coverage to an estimated 150% (with regulatory reserves), much higher than the 96% registered as at end-December 2020. After considering special dividends to shareholders, the AHAM sale will provide a 140 bp uplift to the Group’s common equity tier-1 (CET-1) capital ratio. The partial divestment of AFFIN Bank’s insurance operations will add another 20 bps to the capital ratio. Combined, we estimate that these exercises will raise the Group’s year-end CET-1 capital ratio to almost 15% (without transitional arrangements) (end-June 2022: 13.2%), providing another layer of defense against unforeseen credit impairments.
AFFIN Bank’s profitability metrics and funding profile – though improved in the recent years – still lag peers. The Group’s net interest margin (NIM) widened to around 2% in FY Dec 2021 and 1H FY Dec 2022 (from 1.7%-1.8% previously), backed by ongoing efforts to shed higher cost funding. We expect net interest income growth from loan expansion and a mild increase in NIM from the central bank’s successive rate hikes to partly compensate for the loss of asset management earnings. That said, a still high cost to income ratio of above 60% will weigh on the Group’s return on assets and return on risk-weighted assets in the near term. Furthermore, the Group’s share of current and savings account deposits came up to 21.5% as at end-June 2022 (end-December 2020: 22.2%), in comparison to the industry’s 33.3%.
The ratings continue to incorporate support from AFFIN Bank’s ultimate shareholder, Lembaga Tabung Angkatan Tentera (LTAT), which owns a 54.3% stake (including indirect shareholding). We believe LTAT will stay committed to safeguarding the financial standing of the Group, one of the former’s core investments.
We have similarly revised the rating outlook of debt securities issued by AFFIN Bank and its banking subsidiaries and reaffirmed all the ratings (see Table 1). The financial institution ratings of AFFIN Islamic Bank Berhad and Affin Hwang Investment Bank Berhad are equated to AFFIN Bank’s in view of their strategic importance to the Group.
AFFIN Bank Berhad
i. Financial Institution Ratings
ii. RM6 bil Senior and Subordinated Medium-Term Notes Programme (2017/2117)
iii. RM3 bil Additional Tier-1 Capital Securities Programme (2018/2118)
* Subject to a combined limit of RM6 bil.
(603) 3385 2509
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