AFFIN Bank Bhd is pivoting its lending strategy towards larger commercial borrowers while reducing exposure to the small and medium enterprise (SME) segment as it seeks to strengthen asset quality amid a challenging operating environment, according to Hong Leong Investment Bank (HLIB) Research.
The research house said management is recalibrating its loan portfolio in response to mounting pressures faced by SMEs, including rising operating costs, weaker demand and growing competition from lower-cost Chinese imports.
Commercial banking loans have doubled to approximately RM2 billion from RM1 billion, supported by deeper relationships with larger corporates and payroll customers.
HLIB said the shift should improve the bank’s portfolio quality while allowing it to tap more resilient growth opportunities.
Provisions front-loaded
On asset quality, HLIB noted that AFFIN has front-loaded provisions to strengthen its balance sheet, with RM70 million in provisions recognised during the first quarter of 2026.
While this provides greater resilience, the research house expects credit costs and the pace of SME recovery to remain key earnings swing factors over the coming quarters.
It cautioned that inflationary pressures and ongoing weakness among SME borrowers could continue to cloud the earnings outlook.
Focus turns to monetising digital investments
HLIB said AFFIN has largely completed the heavy investment phase of its multi-year digital transformation programme and is now shifting its focus towards monetising those investments.
The bank plans to leverage its upgraded digital ecosystem by introducing new offerings such as e-wallet services, multicurrency accounts, digital financing products and potential Banking-as-a-Service (BaaS) solutions.
Customer acquisition has accelerated significantly, with the bank’s customer base expanding to 1.8 million from around 800,000 previously.
Meanwhile, its current account and savings account (CASA) ratio has improved to approximately 26%, compared with historical levels in the low teens.
HLIB said these initiatives should gradually support deposit growth, improve customer retention and boost fee-based income.
However, the research house remains cautious, noting that digital transformation typically requires a longer gestation period before translating into meaningful earnings growth.
East Malaysia remains a strategic growth pillar
The report highlighted East Malaysia as one of AFFIN’s long-term growth drivers, particularly Sarawak, where the bank has established a strong franchise.
The bank currently manages RM10.1 billion in deposits and RM3.9 billion in loans in the state while positioning itself as a strategic banking partner to the Sarawak government.
Beyond conventional lending, management sees opportunities in payroll services, investment banking, treasury solutions and asset management as infrastructure, energy and industrial developments gather pace.
HLIB added that AFFIN is now expanding its focus to Sabah following approval for a regional office.
The bank aims to strengthen its commercial banking capabilities ahead of anticipated investments in oil and gas, infrastructure, utilities and tourism over the next two years.
Nevertheless, the research house believes much of the potential growth remains dependent on the execution of government-led development projects.
Dividend policy unchanged
AFFIN has maintained its dividend payout policy of 25% to 40%, with management highlighting continued strong participation in its dividend reinvestment plan (DRP).
HLIB said the bank appears focused on preserving capital to support future growth and transformation initiatives rather than maximising cash distributions.
While this should underpin dividend sustainability, the research house does not expect a significant increase in payout over the near term.
It revised its dividend per share forecasts to 9.0 sen for FY2026, 10.0 sen for FY2027 and 11.0 sen for FY2028, implying an average payout ratio of around 39% annually.
HOLD maintained
HLIB maintained its “Hold” recommendation on AFFIN with an unchanged target price of RM2.40, based on a Gordon Growth Model valuation equivalent to 0.5 times CY2027 price-to-book.
The research house said AFFIN is currently trading close to its five-year forward price-to-book average, suggesting that most of the near-term positives have already been reflected in the share price.
It added that a meaningful re-rating would depend on the bank’s ability to improve return on equity, enhance operating efficiency and deliver sustainable earnings growth through the successful execution of its transformation strategy.
