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.
Improving asset quality
RECOVERIES used to be one of the contributors to income, but over time, this has become less significant. “Credit cost has dropped significantly over the years. In the long term, we are looking at a credit cost of about 25-30 basis points,” says Affin Bankmanaging director Datuk Zulkiflee Abbas Abdul Hamid. A lot of effort is placed on managing asset quality, a process which started way back in 2006 and 2007.
In managing this, weekly committee meetings are held to look at all impaired loans and monitors accounts with early warning signals to nurture them back to health quickly.
Reports indicate that a substantial amount was recovered in 2006-2007 under the former PSCI Industries Bhd and some money was also recovered last year under a loan syndication to Putra Place which is owned by Metroplex Bhd.
“Contrary to market perception, we do not see any legacy issues. Gross non-performing loan (NPL) was RM3bil; that amount came down to RM865mil through our recovery efforts and also writing off. We brought the loan book down to RM16bil and then brought it up again to RM30bil,” says Zulkiflee.
With a positive trend in loan growth and falling impaired loans, the fundamental outlook is good for Affin Bank.
“If our business is not sustainable, you will see the impaired loans position worsening. But this is not the case as you can see our asset quality continues to improve over the years. We are growing, recovering and putting in the right credit culture and skills,” he says.
As part of the transformation process that began seven years ago, strong emphasis is placed on the enhancing of credit and risk culture where relationship managers are trained to be more proactive in managing their accounts.
“Initially the CEO and now, the CRO (chief risk officer) takes it through to the credit people and relationship managers on a weekly basis,” he adds.
“We started issuing “lessons learnt” case studies on operational, market and credit risk,” said group CRO K. Kasinathan.
Focus was also placed on how to manage customer relationships and structure facilities.
An internal credit/operational risk certification programme was drawn up covering business, consumer credit, operational and market risk. An e-learning portal was also set up in 2010.
Credit and operational risk workshops and Friday credit clinics are conducted by the group CRO.
“We have revamped the credit policy and risk framework,” says Kasinathan.
While drawing up the 2012 credit plan, Affin has considered the external environment and decided that within this consolidation phase, conservation of capital as well as preservation of asset quality would be pivotal in ensuring business sustainability.
As such, capital injection by shareholders is under way with RM500mil already raised in the first quarter of the year. Another tranche for capital injection is in the works.
Among key risk initiatives undertaken are the standardisation of loan documentation, setting up of a consumer credit scoring solution and loan management system.
Also in place is a business loan credit rating system that is robust enough to be mapped to external rating agencies.
A loan origination system for the consumer mass market products has been set up, followed by a system for business loans by the middle of this year.
Affin Bank looks East
WHILE the focus has been on firming up its foundation on local shores through a bank-wide transformation the last seven years, Affin Bank has not let slip expansion opportunities across the seas too.
One such is through its partnership with Hong Kong-based Bank of East Asia Ltd (BEA) which Affin is banking on as the route into China’s unexplored Islamic banking landscape.
However, talks about venturing into China is still in its preliminary stage and Affin believes that it should go through the process of engaging the Chinese authorities before further commenting on the matter.
That said, the potential for spreading its wings abroad is there. With a connection with BEA, Affin can join forces to leverage on its global reach and experience.
BEA first surfaced as a substantial shareholder in Affin in June 2007. The bank started actively picking up shares in Affin in the middle of 2009 and is now the second largest stakeholder with a 23.52% block.
Affin Bank plans to market Islamic banking products in north-western China where BEA has a branch in Urumqi.
In August 2010, Affin Bank’s parent company Affin Holdings Bhd (AHB) signed a memorandum of understanding with BEA establishing a strategic partnership to jointly develop their business potential in mainland China, Hong Kong, Malaysia and other key markets where they both operate.
Affin’s interest in introducing Islamic banking to the China market has been on the table since and BEA has been playing a role in expediting talks with the China Banking Regulatory Commission.
Earlier this week, Affin told the media after its AGM that it was optimistic to be the first local bank to secure a presence in mainland China in the medium term.
Affin has a mind to market Islamic banking products in the Muslim-majority population areas in north-western China where BEA has a branch in Urumqi.
AHB chairman Tan Sri Mohd Zahidi Zainuddin said then that the strategic partnership would enhance AHB’s ability to support its customers who want to have a business presence in China and Hong Kong by leveraging on BEA’s strong presence and extensive branch network there.
“We are confident that this strategic alliance will place both Affin and BEA in a better position in many important Asian markets.”
Mohd Zahidi had said that the areas where both banking group could explore include treasury, Islamic banking, investment banking and asset management.
Alliance Research banking analyst Cheah King Yoong says the partnership will be beneficial to both parties.
“Although we acknowledge that this venture is unlikely to be earnings accretive in the near term, we foresee a deepened strategic alliance between AHB and BEA going forward,” he says, adding that one way the strategic partnership could be fruitful for both sides is Affin leveraging on BEA’s extensive network and expertise in the region to launch its Islamic products.
While he says there is not much information available at the moment, Cheah understands that BEA has been interested to increase its stake in Affin.
“Therefore, we believe that the potential for BEA to increase its stake in AHB is imminent, in view of further liberalisation in the domestic banking sector by Bank Negara in December last year with the unveiling of the Financial Sector Blue Print,” he says.
Around South-East Asia, Affin has also expressed keen interest in Indonesian bank PT Bank Ina Perdana, which if acquired, Affin intends as a full-fledged Islamic bank.
The group is now waiting for the Indonesian central bank, Bank Sentral Republik Indonesia’s formal agreement to allow Affin to hold at least a 51% stake in the small bank.
Deputy chairman Tan Sri Lodin Wok Kamaruddin says that “the informal indications so far seems to be quite positive.”
He adds that Affin would not be interested in acquiring should it end up holding less than 50% stake.
Other than Indonesia, Affin also hopes to establish banking operations in recently democratised Myanmar but such ambitions depend on the Government’s relations with Myanmar.
BEA, incorporated in Hong Kong in 1918, provides comprehensive commercial and retail banking services. It is listed on the Hong Kong Stock Exchange and is one of the constituent stocks of the Hang Seng Index.
As the largest independent local bank in Hong Kong, it has total consolidated assets amounting to HK$611.4bil (RM241.44bil) as at Dec 31, 2011.
The bank also operates one of the largest banking networks in Hong Kong, with more than 150 branches and financial centres throughout the city.
BEA entered the mainland China market in 1920 when it first opened a branch in Shanghai. It is the largest foreign bank in China with more than 100 outlets in major urban centres the country over.
In other parts of the world, BEA has presence in North America, the UK, Singapore and Malaysia. It has branches in Los Angeles and New York as well as a New York-based subsidiary, Bank of East Asia (US) and North America.
As a gauge of the banking group’s size, BEA operates more than 220 outlets and employs over 12,000 people worldwide.
In 2007, it was one of the first foreign banks to receive approval from the China Banking Regulatory Commission to establish a locally-incorporated bank in mainland China, the Bank of East Asia (China) Ltd, which offers a full range of banking and financial services.
BEA is 15.09%-owned by Tan Sri Quek Leng Chan through Guoco Group Ltd.
MD speaks on management issues and outlook
StarBizWeek recently held a question and answer session with Affin Bank managing director Datuk Zulkiflee Abbas Abdul Hamid. Below are excerpts:
What is your plan for developing Islamic banking in China?
We have talked a lot about this and we have to work very closely with our partner BEA in China. We were made to understand that the regulators like the Chinese Banking Regulatory Commission and thePeople's Bank of China have given some flexibility in certain parts of the country for rudimentary Islamic banking products.
We are working with our partner to see whether this flexibility can be accorded to us, through BEA, to provide Islamic banking services in the country.
I know it is going to be challenging because the Chinese authorities has yet to come out with the relevant framework to the effect, in other words, we are not able to set a definite time line for setting up Islamic banking operation in China.
We will continue to put in the necessary efforts and hopefully be among the first if not the first bank to introduce Islamic banking in China.
Our partner has been very proactive and in fact, BEA's David Li himself has taken a keen interest in this matter.
Can you tell us about loan loss provisions and write-backs?
If you look at the last couple of years, yes, the write-back and recovery contributed quite substantially to our bottom line but as our asset quality improves and at the same time our loan book grew from RM16bil to RM30bil, our dependability on write-backs and recovery became lesser.
Contribution from write backs and recoveries to our bottom line has been on a downward trend over the past six years. Moving forward we are not expecting write backs and recoveries to contribute significantly to our bottom-line.
As for the loan loss provisioning, we are looking at our credit cost to stay around 25 to 30 basis points in coming years.
In terms of legacy loans, is it true that they are almost totally wiped off?
Legacy loans are mostly taken care of via recovery and write-off. When people talk about our legacy loans, we should ask them which legacy loans they are referring to. Most of them have been resolved and it is an old story.
Gross NPL was RM3bil at its peak and we brought it down to RM865mil. Those are the legacy loans that we have either written-off or recovered subsequently. Through recovery and write off we brought down our loan book to RM16bil and then grow again to RM30bil over the last six years. Our net impaired loan ratio has shown continuous improvement over the years and has remained within the industry average.
How did you break away from the market perception that you all are ruled by the generals from LTAT?
If you look at the composition of our board, the chairman is an ex-Armed Forces chief by virtue of LTAT being the major shareholder, but we also have corporate figures like Tan Sri Lodin who sits on LTAT, Affin Holdings Bhd, Boustead and many other GLCs, we have the advantage to leverage on his knowledge and experience.
We also have a doctor, accountants and ex-CEOs of public listed companies as well as BEA representatives who are bankers.
Furthermore, our independent board members come from various backgrounds such as pharmaceutical, oil and gas and so on.
People always perceive that the bank is run by the army, and this is not true. It has always been the stand taken by our ultimate shareholder (LTAT) to have the bank managed by professionals who are accountable for ensuring sustainable returns to the shareholders.
There is also a perception that we have a significant portion of our lending to the LTAT and Boustead group of companies.
This is not possible as there are Bank Negara's guidelines in place to limit related party transactions to one time the capital base.
Furthermore, even though we are part of the LTAT or Boustead Group, we don't automatically get the business. We still need to compete with other banks.
Sometimes people think Affin Bank is doing alright because it has LTAT, which owns its parent company Affin Holdings Bhd, to lend to. Is this true? Sometimes people are not clear on the policies and guidelines which are in place. I cannot lend more than what is imposed by the guidelines.
For information, the total amount that the Bank lend to connected party be it Affin Holdings, LTAT, Boustead or any other companies with common board members will be aggregated.
Currently our connected party exposure is which is well within the maximum allowable limit. Furthermore, the connected party exposure accounts for less than 10 % of our total outstanding loans and advances of RM30bil.
We are cannot be dependent on LTAT or Boustead Group of companies alone in order to sustain our business.
We still have to compete with other Banks in terms of services, product offerings as well as pricing to get these businesses.
This misperception is one of the issues that we want to correct.
What is the potential for non-interest income growth?
With the thinning of margin it is inevitable for us to look at enhancing our fee base income.
Our traditional non interest income usually comes from syndication, arranger and participation fees as well as commissions.
Greater emphasis is being given in identifying new businesses such as bancassurance, unit trust and more.
Non-interest income forms about 20% of our total income and we hope to enhance and increase the contribution to 25% in the immediate term.
What about the challenges in net interest margin compression? Some are saying that it may moderate and ease off.
There is pressure in terms of the net interest margin. The competition has been intense as there are lot more players in the market now.
Also, everyone is getting up and preparing for Basel 3. Under this, there are areas that attract more capital and there are those that attract less.
Everybody is strategising and looking at which business to focus on and everyone has the same idea that's why they are all in mortgages.
That explains why there is intense competition in mortgages.
With the liquidity coverage ratio coming in, everyone has eyes on deposits like the consumer deposits and low-cost deposits.
Everyone came up with campaigns after campaigns to the extent that the interest rate that we pay for the deposits are on the steady increase.
Margin for loans are coming down but cost of deposits are going up so there will be a squeeze naturally.
I supposed this is going to be the trend for the next few years.
- The Star Biz
Saturday April 21, 2012
