AFFIN: Strong Quarterly Performance Driven by Cost Efficiencies

The financial institution reported stronger-than-estimated results for the third quarter of 2025, driven primarily by effective cost management. Net profit for the quarter stood at MYR145 million, representing a 1% quarter-on-quarter increase but a 1% year-on-year decline. This performance contributed to a nine-month 2025 net profit of MYR413 million, marking a 10% year-on-year growth and surpassing 83% and 77% of the investment bank’s and consensus full-year forecasts, respectively.

Performance Review

A key deviation from expectations stemmed from credit costs, where the bank recorded a net impairment writeback of MYR35 million in 3Q25, following the release of management overlay reserves. This significant writeback underscores robust asset quality management and contributed substantially to the positive earnings surprise.

However, the net interest margin (NIM) experienced a 5-basis point quarter-on-quarter contraction in 3Q25, influenced by the Overnight Policy Rate (OPR) cut. This, combined with large foreign exchange losses (expected to reverse in 4Q25), led to a 5% quarter-on-quarter decrease in operating income, which was also down 4% year-on-year. The nine-month 2025 Return on Equity (ROE) was 4.6%, falling short of the initial 6% target but aligning with the revised management target of 4.8%.

Operational Dynamics and Outlook

Gross loans demonstrated solid growth, increasing 8% year-on-year and 3% quarter-on-quarter in 3Q25. This expansion was primarily fueled by strong performances in community banking, which grew 10%, and enterprise banking, up 13%. While corporate loan growth remained negative on a year-on-year basis, management expressed confidence in a 4Q25 turnaround, with approximately MYR2 billion in targeted disbursements anticipated from its MYR13 billion pipeline.

Deposits saw a 1% quarter-on-quarter decline, attributed to the strategic release of high-cost corporate deposits and a net outflow in current account savings account (CASA) funds. The gross impaired loan (GIL) ratio recorded a slight sequential uptick of 3 basis points to 1.86%, stemming from SME and corporate segments. Nonetheless, existing provisions absorbed these, leading to a decline in loan loss coverage (LLC) to 70% from 79% in 2Q25. Management remains comfortable with the current LLC levels, citing visibility on MYR200 million worth of expected recoveries by 4Q25. The group’s CET-1 ratio remained broadly stable at 13.5%, with potential for a 20-30 basis point capital uplift from new central bank credit risk guidelines. The bank is also keen to pay out dividends in 4Q25, potentially with a dividend reinvestment plan.

Strategic Growth and Future Earnings

In a strategic move, the bank announced the proposed acquisition of Pheim Asset Management for MYR50 million in cash. Pheim managed MYR876 million in assets under management (AUM) as of June 2025. Management is confident in Pheim’s capabilities and its potential for rapid scaling with support from the broader group’s client base.

Looking ahead, the investment bank has revised its FY25F earnings upwards by 11%, factoring in the net impairment writeback. However, FY26-27F net profit estimates have been trimmed by 5% due to more conservative income assumptions. Management has also tempered its 2025 guidance, including a revised ROE target, reflecting a cautious yet focused approach to growth amidst evolving market conditions.