Affin – seeking fresh perception

Affin banking group has improved much since the days of high NPLs. The onus is now on the bank to shake off its poor market impression.

A STIGMA is often hard to wash away. And that's in spite of the evidence to show that past perceptions don't hold water anymore.

That is somewhat the quandary the Affin banking group finds itself in.

It has transformed its chequered past of high non-performing or impaired loans where ratios had easily hit double digit to one where its balance sheet today is far more healthy than its previous reputation suggests.


Affin Bank top management team: (sitting from left) Affin Islamic Bank CEO Kamarul Ariffin Mohd Jamil, Zukiflee and group chief internal auditor Khatimah Mahadi. (standing from left) Chief corporate strategist Nazlee Khalifah, business banking director Amiruddin Abdul Halim, consumer banking director Idris Abd Hamid, chief HR officer Nor Rozita Nordin, chief recovery specialist Datuk Mohamad Aslam Khan Gulam Hassan, CFO Ee Kok Sin, executive director of operations Shariffudin Mohamad, group chief risk officer Kasinathan T. Kasipillai and finance head Ramanathan Rajoo.
However, that improvement is not reflected in the share price of its holding company Affin Holdings Bhd which continues to be dogged by poor market perception that the banking group is still carrying these legacy loans when the opposite is true.

Apart from the market perception, the holding company's shares also suffers from lack of market liquidity.

“Our recovery efforts as well as the writing off of impaired loans had brought down the loan book to RM16bil, which we subsequently grew to RM30bil through the creation of quality credits,” Affin Bank managing director Datuk Zulkiflee Abbas Abdul Hamid tells StarBizWeek.


In 2005, gross impaired loans stood at RM3bil; that came down to RM865mil, some of which was written off and the balance recovered.

As at Dec 31, the net impaired loans ratio was 1.31% and gross, 2.85% while the industry's gross impaired loans ratio is 2.9% and net, 2%.

“We are very much within industry numbers in respect to impaired loans,” says Zulkiflee. “This is something that is very much the forefront for us in terms of managing our loan assets. Inculcating credit culture is very important for the bank. Since 2006, we have aimed for sustainability in our business with emphasis on asset quality.”

Priorities

Taking into account the economic environment for this year, Affin Bank has decided to exercise caution; it is aiming for a double-digit loan growth of between 10% and 12%.

“For us, this is a year of consolidation and therefore preservation of capital and maintaining of quality loan assets will be our main focus,” says Zulkiflee. “There is pressure in the form of thinning net interest margins. We aim to concentrate on the basics and be ahead in terms of deposits and loans.”

Affin Bank has been enhancing its fee-based income over the years and this will remain as one of the main key performance indices (KPIs) in the coming years.

Currently, fee income accounts for approximately 20% of total income, with an immediate target of 25% and higher, moving forward.

The bank's fee income is mostly from underwriting and loan syndication fees as well as foreign exchange.


“We will also be diversifying our fee base income through sale of unit trusts and insurance,” he says. “We are not resting on our laurels. We are, in fact, looking for opportunities to enhance both fee income as well as our loans and advances.

Over the last six months, Affin has strengthened its workforce to cope with increased business in bancassurance and other areas.

On the funding side, Affin Bank is diversifying its deposit base rather than relying on the money market as retail deposits are more sustainable.

“Currently, there is steady growth in our fixed, current and savings accounts. We are very near to our target of ensuring that our current and savings deposits make up 25% of the total deposit base.

“We want to ensure that we are ready for Basel 3 (in terms of liquidity coverage and net stable funding ratios) by 2015 and 2018,” says Zulkiflee.

Balancing risk

One of the issues of yesteryear has been the bank's exposure to big business loans but today, there is a proper balance between business and consumer loans.


Within business banking, there is a good distribution of small and medium scale enterprises (SMEs), institutional, contract financing and commercial loans, so as to diversify risk.

Within the consumer loans of RM14.43bil, the biggest portion comprises hire purchase (HP) loans.

HP stands out at 60% total consumer loans but the risk is manageable as shown by the net impairment ratio of 1.2% as at Dec 31 (0.8% as at March 2012).

The focus is on financing of new cars especially the higher end makes.

Mortgage loans have grown annually by an average of 5.4% over the past six years.


Affin Bank focuses on borrower risk profile rather than the properties themselves. The majority of the customers are mainly professionals, and those working in the government and government-linked companies (GLCs).

A significant portion of the mortgage portfolio are landed properties located in the Klang Valley, Penang and Johor Baru.

“We are managing our impaired loans as a total,” says Zulkiflee. “The bank's net impaired loans ratio is only 1.3%, and it is manageable compared with our loan base of RM30bil.”

Impaired loans in construction used to be quite high; however, after 2005, that ratio has come well within the industry average.

Bank Negara guidelines allow the bank to lend up to 25% of its capital base to a single customer group but internally, a cap with a lower limit has been set to ensure diversification of risk and exposure to a single group.

In terms of connected party lending, the bank can go to the maximum of one time of the capital base; currently, Affin Bank's total connected party lending is at the halfway mark.

As such, the bank has room to grow and is on the lookout for good business opportunities within the Lembaga Tabung Angkatan Tentera (LTAT) /Boustead group.

Sustaining growth

Beside normal business expansion, recoveries used to contribute significantly to income.

However, with impaired loans being resolved, the bank is focusing mostly on loans growth and fee-based income.

The bank has been able to manage its cost very well. Cost-to-income ratio has been trending downward from as high as 52% to 46% currently, which is within the industry standard.

“We started to expand our reach by opening up new branches and relocating some of the existing branches in new growth areas as well as, extending our automated teller machine (ATM) network,” recalls Zulkiflee.

Investment in physical and IT infrastructure and human capital has been intensified since 2008.

Loan growth is very important for sustaining the business. “If you look at 2005 to 2007, there was minimal loan growth. Prior to 2005, the impaired loans that the bank carried was very high.

“In order to move forward, we intensified our recovery efforts, apart from writing off and putting in new loans to replace the bad ones.

“There was loan growth but it was just a replacement. Once we were on a stronger footing, we could see the loans starting to grow,” says Zulkiflee.

In 2005, Affin acquired ACF Finance Bhd and with that came the HP portfolio.

“We leveraged on the HP capability for further expansion and at the same time, we went back into mortgages with a new set of product guidelines and policies to target certain types of houses and borrowers. It was the same strategy with HP,” says Zulkiflee.

What the market thinks

Initiating coverage on Affin with an outperform rating, Kenanga Research says Affin presents a good and under-appreciated investment proposition.

“While we view Affin's credit quality risk as inherently higher than its mid-to-big bank peers, we believe this is already priced in by the stock's valuation discount, which is already based on a more conservative set of earnings/credit cost assumptions that we used fir other mid-to-big banks,” says Kenanga in its report.

Kenanga's estimates for financial 2012/13 assumes credit cost of 23 to 34 basis points, somewhat within the range of 6 to 47 basis points it is assuming for the rest of the banks.

“This is due mainly to Affin's improving risk management and better asset quality outlook,” says Kenanga.

Affin's reported net impaired loans ratio for 2010 was 3.03% which is within the industry's 3%. However, its impaired loans ratio of 2.31% for 2011 was better than the industry's 2.7%, says Kenanga.

Mortgage loans were the main contributor to Affin's total impaired loans of RM883mil, as at Dec 31, 2011. The impairment ratio for mortgages was as high as 8%, although it has been steadily decreasing since the 17% recorded for 2007.

“We believe the trend is likely to continue to improve as Bank Negara is promoting a responsible finance policy to improve lending quality in the banking system,” says Kenanga.

Cheah King Yoong, analyst at Alliance Research, sees that following its restructuring exercise over the past few years, Affin Bank has emerged as a stronger and more efficient banking entity.

“We foresee that through the increased collaboration with Bank of East Asia (BEA), Affin Bank could emerge as niche Islamic bank in the region,” says Cheah.

“The bank is professionally run now and we see the strengthening of their operations over the years.”

Affin Bank has recently announced that it is collaborating with BEA to set up Islamic banking operations in China in the second half of this year. “Although we acknowledge that this venture is unlikely to be earning accretive in the near term, we foresee a deepened strategic alliance between Affin Holdings and BEA, going forward.

“This strategic partnership can be fruitful for both sides with Affin Bank leveraging on BEA's extensive network and expertise in the region to launch its Islamic products,” says Cheah in his report.

According to Cheah, Affin's turnaround story is persistently overlooked by the investment community.

As 75% of its HP portfolio comprise loans for the purchase of non-national cars, the slowdown in national car sales due to the imposition of lending guidelines should not affect Affin.

“Affin's loan portfolio is fairly diversified. Its housing and HP loans constitute 14.6% and 28.5% of its total loan portfolio as at Dec 31, 2011. The group is not highly exposed to any loan segments that could suffer from net interest margin (NIM) compression.”

“Given the remarkable turnaround of Affin's operations, current valuation is compelling, trading at forward price to earnings ratio of 8.2 times and about 28% discount against its 2012 book value,” says Cheah.

Key downside risks include lower than expected loan growth, NIM compression due to competition and/or interest rate cut and deterioration in asset quality.

According to Low Yee Huap, head of research, Hong Leong Investment Bank, one major negative factor facing the banking group was investors' perception and its track record of legacy loans. Besides that, lack of liquidity was another issue that should be addressed pretty soon.

Among the positive factors, he cites improving asset quality, profitability and higher dividends.

On the outlook for Affin, Low sees improving fundamentals as a result of the transformation they have gone through; however, the group also faces intense competition from much larger peers in the banking sector.

In his report, Low mentions potential merger and acquisition (M&A) excitement, given that Affin is one of the two smallest banks with asset size of about RM50bil, which is about half the size of AmBank, the next largest bank