Affin Bank exposed to asset quality issues

The bank is likely to increase its pre-emptive provisioning in the short haul as its GIL ratio is expected to stay at low levels in 1H21


AFFIN Bank Bhd remains at risk of having to make impairments and provisions to assets due to the negative impact of the Covid-19 pandemic.

Hong Leong Investment Bank Bhd (HLIB) in a report yesterday noted that Affin Bank’s third-quarter results ended Sept 30, 2020 (3Q20), missed its estimates due to high bad loans provision the banking group made.

The investment bank’s research analyst Chan Jit Hoong noted that Affin Bank is likely to increase their preemptive provisioning in the short haul as its gross impaired loan (GIL) ratio is expected to stay at low levels in the first half of next year (1H21).

“Loans growth is seen to stay tepid for now as Covid-19 related headwinds drag near-term showing, but it should pick up pace six to 12 months down the road.

“We expect the GIL ratio to stay at low levels in 1H21, since troubled borrowers can obtain targeted assistance from Affin Bank. However, this may hide actual damage and lead to a lag in non-performing loans formation if the situation does not improve swiftly.

“As such, Affin Bank is likely to raise its preemptive provisioning in the short haul, but it will drop and normalise progressively,” he said in a note.

Affin Bank reported a lower 3Q20 pretax profit of RM363.2 million last week compared to RM510.7 million in the same period last year, due to a higher allowance on loan impairment and other assets of RM286.6 million, a one-off modification loss relating to Covid-19 loan moratorium amounting to RM79.7 million, as well as lower net interest income of RM32.5 million.

The group took a RM70 million preemptive Covid-19 provisioning as a precautionary measure for asset quality weakness due to the pandemic.

“We are focusing on assisting our customers to weather the Covid-19 pandemic and providing them with financial assistance to help sustain them through the economic downturn.

The bank will continue to manage its credit risk by providing appropriate temporary relief to customers who have been most affected by the Covid-19 pandemic. We also want to ensure that we have adequate loan loss reserves to protect the bank from asset quality weakness during this pandemic” Datuk Wan Razly Abdullah Wan Ali, president and group CEO noted in a release last week.

HLIB has reduced forecast earnings for Affin Bank by 3%-18% for financial year 2020 (FY20) until FY22 to factor in the higher than expected bad loans provision.

The firm has a ‘Hold’ call on the banking group with a higher target price of RM1.65 based on a higher 0.32 times FY21 price-to-book ratio and assumptions of 4.3% return on equity (ROE), 7% cost of equity capital and 3% long-term growth.

“This is below its five-year mean of 0.47 times and the sector’s 0.86 times. The discounts are justifiable given its lower ROE generation, which is one percentage point (ppt)/four ppts beneath its five-year/industry average,” Chan noted.

Affin Bank’s net profit dropped 32.7% year-on-year (YoY) to RM48.72 million in the 3Q20 partly due to a higher effective tax rate which increased by 11 ppts.

Revenue for the quarter rose 46.4% YoY to RM694.2 million.

For its nine-month period, Affin Bank’s net profit declined 34.5% YoY to RM239.69 million, while revenue increased 27.2% YoY to RM1.84 billion on higher net gain on financial instruments of RM403.9 million, higher Islamic banking income of RM49.9 million and higher net fee and commission income of RM49.3 million.