Sarawak government’s impending increased stake in Affin could keep valuations elevated

KUCHING (Aug 26): The Sarawak government’s impending purchase of a further 15 to 25 per cent stake in Affin Bank Bhd (Affin Bank) could keep its valuations elevated in the near-term, analysts observed.

Of note, Affin continued to show weakness in its performance for the second quarter of 2024 (2Q24) as its net interest margin (NIM) remained compressed.

According to a report by MIDF Amanah Investment Bank Bhd (MIDF Research), Affin’s first six months of the financial year 2024 (6MFY24) core net profit (NP) of RM229 million was down by 13 per cent y-o-y, largely dragged by a sharp increase in operating expenditure (OPEX) and weaker net interest income (NII) and associate results.

It also pointed out that Affin’s NIM fell by -4bps quarter-on-quarter (q-o-q) and is expected to narrow further, in contrast to the rest of the industry.

Currently, the research team believed the only thing that offers a meaningful jumpstart to Affin’s NIM is if there is a huge current and savings account (CASA) inflow upon completion of a new shareholder.

In this case, the possibility of Sarawak’s government being its biggest shareholder.

More specifically, it opined that Affin might likely see a huge influx of deposits from the new shareholder – though it noted that Affin’s management remains uncertain about the potential scale of inflows.

It also said that Affin’s weak deposit franchise coupled with high loan growth requirements has led to persistent liquidity issues in the past.

Meanwhile, the research team at RHB Investment Bank Bhd (RHB IB) said the Sarawak government has obtained approval to acquire a further 15 to 25 per cent stake in Affin, and is ironing out the fine print of the agreement.

“With economic activity expected to ramp up in the state, we think Affin’s clear-cut benefit lies in the fee income space (eg investment banking deals, loans-related fees),” it opined.

However, it also highlighted that Sarawak’s NII potential for Affin looks rather mixed.

The bank’s cost of funds could benefit from an influx of Sarawak CASA (circa RM3 billion or around 16 per cent based on the research team’s checks channel checks) but the loan growth in Sarawak should still be subject to the above-mentioned NIM and asset quality challenges.

On the near-term movement of Affin’s share price pending the completion of a larger acquisition by Sarawak’s government, MIDF Research opined that its share price could go either way.

It explained that Affin’s share price may revert to something more representative of Affin’s weak fundamentals upon completion of the deal with the Sarawak Government as a new shareholder.

At the same time, it noted that its fundamentals could be supported via the potential for a large deposit influx which could resolve Affin’s weak dividend yield issue by providing a sizeable capital buffer as well as helping with its liquidity situation.

Affin could also now function as a “Sarawak economy proxy”, whose share price movement may be linked to any positive or negative Sarawak economy news flow, the research team pointed out.

All in, both research houses recommended a ‘sell’ on the stock while uncertainties continue to trail its performance.