Thursday, May 19 2022

KUALA LUMPUR (January 31): Some analysts are cautious about the potential long-term impact on Affin Bank Bhd’s earnings as well as its return on equity (ROE) from selling its entire stake in 63% in Affin Hwang Asset Management Bhd (AHAM).

This is due to the loss of AHAM’s profit contribution; CGS-CIMB noted that the asset management unit contributed a net profit of RM72 million to Affin Bank for the year ended 31 December 2020 (FY20).

“Assuming a profit contribution of RM88 million from AHAM in FY23F (three-year CAGR [compound annual growth rate] 7% in years 21 to 23) against interest income of RM31.9 million (net of tax) on the disposal proceeds of RM1.4 billion (assuming a rate of interest of 3%), the agreement results in a reduction of RM56. 3 million or 10.7% of our projected FY23F net profit (NP) for Affin Bank,” research house analyst Winson Ng said in a note on Monday (January 31).

Last Friday (January 28), Affin Bank through its wholly-owned subsidiary Affin Hwang Investment Bank (AHIB) signed an agreement to sell its stake in AHAM to Starlight Asset, an investment holding company formed by funds managed by CVC Capital Partners for RM1.42 billion.

“The group will recognize a disposal gain of RM1.07 billion on the sale of its 63% stake in [AHAM] to HVAC. The sale will allow the group to realize a premium based on the consideration, which represents a historical price for AUM [asset under management] and PE [price-earnings] multiple of 3.1% and 19.7 times respectively, based on [AHAM’s] audited financial statements for the year ended December 31, 2020 [FY20]Affin Bank said in a statement.

Ng said the deal came as no surprise, noting that Affin Bank had explored various options to improve its capital ratios, including selling assets.

“We are encouraged that the stake is to be sold at strong CY20 P/E valuations of 19.7x and Price-to-AUM ratio of 3.08%, which are above the average of 15.2x and 2 .64% respectively, from past mergers and acquisitions. [mergers and acquisitions] transactions involving portfolio management companies. We do not expect the bank to pay out the proceeds in the form of special dividends, but the increase in its Common Equity Tier 1 (CET1) capital ratio following the transaction could increase its longer-term dividend payout. Ng said.

According to Hong Leong Investment Bank (HLIB) Research, AHAM’s contribution to Affin Bank is 20% to 30%, and the loss of this part of the business could reduce the bank’s ROE by 100 to 150 basis points. (bps) during EX23.

“We understand that Affin’s primary intention is to reinvest the sale proceeds to boost its core banking business. However, we believe this is a slow way to fill the void left by AHAM. In addition, ROE would also be affected by the broadening of the capital base, resulting from the disposal gain of RM1 billion (estimated at 40 basis points).

“Nevertheless, Affin has not ruled out the potential for special dividends, which in turn can help ease the pressure on ROE (we have calculated that each payout of RM100 million or a dividend yield of 2.6% , can increase ROE by 4 basis points),” said Chan Jit Hoong, an analyst at HLIB. .

Separately, the analyst noted that the bank was also redeeming its RM1 billion medium term notes (MTN) which have a high coupon rate of 5.45%, resulting in a saving of RM55 million. RM.

“This decision improves ROE by 35 basis points. Considering the loss of revenue from AHAM, the cost savings from the MTN takeover of RM1 billion and the broadening of the equity base, we estimated that the overall net negative impact on our earnings forecast for FY23 is 13% to 24%, while ROE could fall 105 to 155 basis points. “said the analyst.

CGS-CIMB and HLIB maintain Affin ratings

Ng said CGS-CIMB stood by its recommendation to “cut” on Affin Bank as the research house sees higher credit risks for the bank compared to its peers – as the gross impaired loan (GIL) ratio of the bank’s 3.14% at the end of September 21 was higher than the industry’s 1.57%.

“A potential downgrade catalyst is a larger increase in the GIL ratio relative to its peers in 2022F. In addition, we expect the divestiture of AHAM to reduce its fee income for FY23F, while any significant increase in net interest income resulting from the strengthening of the bank’s capital can only be realized in the longer term.

“Our FY21-23F EPS guidance and DDM (dividend discount model) based target price of RM1.27 are intact pending deal completion. We prefer Hong Leong Bank for exposure to Malaysian banks,” added Ng.

HLIB maintained its “buy” call on Affin with a target price of RM2.25, Chan said.

“In our view, Affin’s risk-reward profile is still favorably tilted to the upside, as the disposal of AHAM and potential special dividends are catalysts for revaluation. Essentially, monetizing AHAM at a price of RM1.4 billion would indeed have an initial charge of 10 years on its revenue, which is not a bad thing.

“Additionally, Affin finds itself with a multitude of business levers to explore despite the slowdown in short-term ROE. In addition, from our reverse SOP (sum of the parts), we calculated that the market only values ​​its commercial banking unit at 0.27 x P/B with an ROE output of around 3% (normalized ROE: 4%) compared to its peers 0, 90x P/B with 9% to 10% ROE, implying there is an upside from current levels,” added Chan.

MIDF and Kenanga positive on divestment

MIDF Research, on the other hand, is positive about the impact of the sale on Affin’s balance sheet, despite the apparent risks.

MIDF says focus on higher potential corporate and municipal loan portfolios is a step in the right direction as Affin seeks to address its issues of asset quality and underperforming ROE .

“The time frame in which it is able to rectify this, however, is less certain, although we expect more apparent changes by 2023. We maintain our ‘neutral’ recommendation with a higher target price of 1, 87 RM (vs 1.57 RM). , based on FY22F BVPS anchor [book value per share] at 0.4x PBV [price-to-book-value]. We are increasing our PBV by 0.33x to consider a higher ROE outlook, as well as a much more favorable risk-reward profile,” the MIDF said.

Kenanga Research maintained its “market performance” rating on the bank and raised its target price from RM1.55 to RM1.65, saying the additional funds would strengthen the group’s capital management.

Although the above development would improve the group’s performance in the medium term, analyst Clément Chua said the research firm expects visible results in the short term given the bank’s very ambitious plans, in particular to build a More sustainable long-term ROE.

“We are positive about this development as it will help deliver on the group’s FY22 plans that we were previously skeptical about. In addition, it is understood that the disposal will not be subject to the one-time prosperity tax for fiscal year 22, which is a relief for the group.

“The expanded war chest could help the group increase its market share where it aspires to reach a loan portfolio of RM90 billion by FY25 (3QFY21: RM49 billion). there is no promise on special dividends from this deal, we estimate that every RM100 million rewarded to shareholders would result in an additional dividend payment of five sen (2.8% yield),” Chua said. .

As of this writing on Monday (Jan 31), Affin Bank shares were trading down one sen or 0.56% at RM1.78, giving the bank a market capitalization of 3.78 billion. from RM. It saw 1.95 million shares traded.

Read also:
Affin Bank and Selected Shareholders Sign Agreement to Sell Affin Hwang AM’s Stake to CVC’s Starlight Asset, The Edge Report Confirms
Affin Hwang Asset Management Deal Brings CVC Capital’s Malaysian Investment to Over US$1 Billion


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