Affin Bank expects fixed deposits, margins to remain challenging in 2019


Affin Bank Bhd expects its fixed deposits and margins coming under pressure this year as the central bank is expected to cut policy rates and new liquidity requirements.

Group CEO Kamarul Ariffin Mohd Jamil (picture) said the impact of the expected cut by Bank Negara Malaysia (BNM) will be “neutral” for the bank.

“We have quite a large book in terms of our fixed assets and we are quite strong in terms of hire purchase and these will actually benefit us from any movement in terms of the interest rate,” he said after the bank’s AGM in Kuala Lumpur yesterday.

BNM is expected to lower the lending rate when the Monetary Policy Committee meets next month. Any changes are based on the domestic economy and external developments. But such interest-rate cut will force lenders to adjust their base lending rates downwards, resulting in lower interest income.

The domestic banking sector is already bracing for a slower loan growth in 2019 on a moderating economy and muted consumer and business sentiments, while net interest margins are expected to come under pressure from deposit competition.

Kamarul Ariffin also said the banks’ margins are expected to come under pressure from the net stable funding ratio (NSFR) requirements, while Affin Bank itself expects to experience a five basis points (bps) to 10bps margin compression.

He said the bank will attempt to “defend” its margins by relying on high yielding assets to mitigate the anticipated decline.

“Strategically, what we are focusing on is higher yielding assets, meaning from the credit card, to small and medium enterprise (SME) area to buffer the impact from any margin compression.

“We are trying to defend our margin, but we do expect some minor margin compression to happen,” he said.

He said the banking group also aims to grow its current and savings accounts by 5% to 10% to buffer the impact.

The NSFR requirements are part of overall liquidity standards applicable to licensed banks in Malaysia to manage and control liquidity risks to ensure long-term resilience.

BNM governor Datuk Nor Shamsiah Yunus said the central bank intends to extend the NSFR observation period to 2020 in view of ongoing banking assessments, according to reports in October last year.

Affin Bank’s non-performing loan (NPL) and cost-to-income ratios were 3.5% and 63% last year, the two factors that influence the lender’s profit.

Kamarul Ariffin said the bank’s NPL in 2018 was largely attributable to a few large accounts which the group is working to bring back to health this year for an improved
NPL ratio of below 3%.

The banking group also intends to reduce its cost-to-income to below 60% in 2019 before bringing it in line with the industry average of 50% or lower, he said. 

Loan growth for the bank is expected at a conservative 3% to 4% this year, driven by the consumer and SME segments, and Kamarul Ariffin said this is due to the moderating outlook for the domestic economy in 2019.

Affin Bank’s gross loans, advances and financing rose 6.3% year-on-year to RM49 billion last year, while total assets grew 8.6% to RM76 billion.

Kamarul Ariffin said the bank is also working towards increasing its SME exposure to 20% of its total loan portfolio in the next three to four years, because while the risk in this segment is high, the returns are equally promising.

He said an ideal book size for the group is 40% consumer, 40% corporate and 20% SME. Currently, consumer loans make up about 50% of the bank’s total loan portfolio while SME loans is close to 8% — the remainder is essentially corporate loans, he said.

Affin Bank is among the smaller banks in the industry today and appears an ideal candidate for BNM’s call for consolidation among local banking players to leverage on economies of scale.

Its largest shareholder, the Armed Forces Fund Board, is also currently undergoing major changes due to accounting irregularities that were believed to have been carried under the purview of the former administration.

Kamarul Ariffin said the bank is not looking at any consolidation exercises at the moment, and any consolidation — if it does happen — will be market-driven.

The bank is allocating RM150 million in capital expenditure for 2019 — a large portion of which will go towards information technology as part of the group’s plan to upgrade its digital capabilities.