CGS-CIMB downgraded its call on Affin Bank Bhd to REDUCE from ADD as it expect a slowdown in loan growth in FY24.
In its Company Note today (Jan 18), it is also trading at rich valuations following the 17.2% rise in its share price over the past one
month to RM2.38 on 16 Jan 2024.
“Its CY24F P/E of 10.6x is now above the sector average of 9.9x, and the second highest in the sector, only behind Public Bank Bhd 11.2x,” it said.
The research house maintained its FY23 to 25F earnings per share (EPS) forecasts and DDM-based target price of RM2.26, with cost of equity of 10.4% and terminal growth rate of 4%.
“Based on our current forecasts, we are projecting a return on equity (ROE) expansion from 1.8% in FY22 to 5.3% in FY25F for Affin Bank.
“We prefer Hong Leong Bank Bhd for exposure to Malaysian banks due to its better asset quality and lower CY24F P/E of 9.8x,” it added.
CGS-CIMB reckoned that the uptrend in Affin Bank’s share price over the past one month has been fuelled by the news of a potential increase in Sarawak government’s (via Sarawak State Financial Secretary or SSFS) stake in the group.
“In a filing to Bursa Malaysia on 8 Jan 2024, Affin Bank said that it had been informed by Lembaga Tabung Angkatan Tentera (LTAT) – the bank’s largest shareholder with a 28.8% stake as at 29 Dec 2023 – that LTAT was in discussions with SSFS relating to Affin Bank shares
“This could signify a potential increase in SSFS’ stake in Affin Bank, in our view. SSFS held a 4.8% stake in Affin Bank as of 29 December 2023, which was acquired in mid-Apr 2023 (112.6 million shares at RM1.97 per share or RM221.7 million in total).”
It reiterates its view that SFSS emerging as one of the major shareholders of Affin Bank in April 2023 as positive for the earnings outlook of the bank in the longer term.
“(This is because) it could catalyse its business growth in Sarawak through closer working relationships with the Sarawak government.
“However, we think that it will take time, at least for more than 1 year, for any positive benefits to materialise, as Affin Bank needs to
formulate a plan, expand its network, and strengthen its operations in Sarawak.
“To achieve this, Affin Bank would have to incur additional costs, such as to open larger number of branches and hire more employees in Sarawak while revenue would only increase gradually over time, in our view,” it added.
Potential de-rating catalysts for CGS-CIMB call include elevated cost of funds and the upside risks to our call include a significant upturn in net interest margin and a steep improvement in cost-to-income ratio in 2024 to 2025F.
