Last Friday, Affin Bank announced the completion of a significant share purchase agreement between Assetfin Holdings Sdn Bhd, a wholly-owned special purpose vehicle of the State Financial Secretary of Sarawak, and Lembaga Tabung Angkatan Tentera (LTAT) along with Boustead Holdings Berhad. As a result, the Sarawak government has increased its stake in Affin Bank from 4.81% to 31%, positioning itself as the single largest shareholder. Meanwhile, LTAT and Boustead Holdings have divested approximately 634.7mn shares, reducing their collective stake in Affin Bank to around 23%. This shift marks a pivotal moment for the bank, creating opportunities for enhanced collaboration and strategic initiatives within Sarawak's burgeoning economy.

Positive Outlook on Shareholder Dynamics

The recent acquisition of a substantial stake in Affin Bank by the Sarawak state government positions the bank to significantly strengthen its presence in the region. With ongoing developments in Sarawak, we are optimistic about the state’s economic prospects, as it is poised to become one of Malaysia’s key economic catalysts.

As the financing vehicle for the Sarawak government, Affin Bank is ideally situated to capitalise on the state's growth potential. The banking group is expected to benefit across multiple business segments, such as advisory roles, loan growth opportunities stemming from the SMEs, and various infrastructure and green energy projects currently being prioritised by the state. We also see opportunities to grow a more substantial CASA deposit base from the potential move in salaries of the Sarawak state's civil servants. With the anticipated increase in salaries for Sarawak's civil servants, particularly through the upcoming revamp of the Public Service Remuneration System (SSPA), which will raise the minimum monthly income to RM2,000, we foresee a substantial opportunity to enhance the bank's CASA deposit base. Collectively, these factors could support management's target of achieving 8% loan growth for FY24 and increasing the net interest margin (NIM) to 1.6% from 1.4%.

Growth Prospects in Wealth Management

We also anticipate growth opportunities for Affin Bank’s wealth management division, driven by Sarawak’s robust economic outlook. We believe the influx of investments and affluent foreign residents presents a valuable opportunity for Affin Bank to enhance its wealth management services. The SarawakMalaysia My Second Home Programme (MM2H) is emerging as an attractive option for foreign investors and retirees seeking affordable second-home alternatives. According to the Sarawak Tourism Ministry, the program is expected to attract 650 applicants in 2024, a substantial increase from the historical average of approximately 148 approved applicants per year since its inception in 2007. The Sarawak-MM2H initiative has successfully drawn "highvalue" retirees, with a total of 2,593 participants approved since its launch in 2007. Notably, most of the current participants hail from China (373), followed by the UK (342), Taiwan (258), Hong Kong (251), the US (198), and Singapore (194).

Some Challenges Ahead

While the outlook for growth is promising, we believe Affin Bank may face near-term cost pressures as it seeks to strengthen its digital capabilities and expand its physical presence in Sarawak. The bank aims to reduce its cost-toincome ratio from 71.6% in FY23 to 64%, which will require careful management of resources and strategic investment in technology and branch infrastructure.

Valuation and Recommendation

We make no change to our earnings estimates at this juncture, pending more guidance from management on the potential uplift in earnings from Sarawak. To recap, Affin Bank reported a weaker set of 1HFY24 results, attributed to lower net interest income, along with higher overhead expenses and allowances. ROE declined to 4.09% vs 4.81% a year ago. With that, we maintain Affin's TP at RM2.95. Our valuation is based on an implied PBV of c. 0.66x based on the Gordon Growth Model. However, given that Affin's share has risen steeply and is ahead of its fundamentals, we are maintaining our SELL recommendation on the stock at this juncture.

Source: TA Research - 30 Sept 2024