KUALA LUMPUR (Feb 7): MIDF Research has upgraded its rating on Affin Bank Bhd from 'sell' to 'neutral' and raised the target price to RM2.24 from RM1.71 in view that the Sarawak state government may be looking at being its largest shareholder.

The revision is despite the research house pointing to still weak fundamentals in the bank, albeit it could see some minor benefits as a result of the looming emergence of the new substantial shareholder.

In a note on Wednesday, MIDF highlighted the potential for Affin Bank to leverage increased Investment Banking (IB) opportunities and fortify its presence in SME and corporate segments, aligning with its shift away from lower-yielding consumer loan segments due to the Sarawak state government's strategic move.

"Affin Bank's Net Interest Margin (NIM) has recently underperformed due to a combination of high lower-yielding loan growth and increased competition in deposit rates.

"As a result, Affin will be slowing down its loan growth, focusing on higher-yielding business loans instead of lower-yielding consumer loan segments, particularly residential mortgages, to preserve NIM," it stated.

MIDF also suggested that Affin Bank could potentially benefit from new shareholders, particularly from the Sarawak state government, by offering support to SME and corporate segments.

Additionally, MIDF identifies opportunities for Affin to strengthen its consumer portfolio through strategies such as branch expansion and targeting business owners and the underbanked.

While acknowledging positive aspects, MIDF stated that Affin's current valuations are deemed unattractive due to its lower Return on Equity (ROE) potential. The bank is currently trading at a 0.52x price-to-book value (P/BV) ratio, well above its 5-year historical average of 0.34x P/BV.

"We opine that this is expensive, well above the 0.4-0.45x P/BV range which we believe that it should be trading at, given that its ROE range will likely remain in the 4%-5% range in the near future," it remarked.

MIDF also urged caution, emphasizing that the benefits of a new shareholder might take time to materialize, and Affin Bank's current valuation is considered high in light of the challenges it faces.

Sarawak-based publication Dayak Daily reported on Feb 5 that the state is looking to be a blockholder in Affin Bank, quoting Sarawak Premier Tan Sri Abang Johari Openg.

The report quoted Abang Johari as saying that it involves a maximum block amount allowed by Bank Negara Malaysia, and negotiations will be finalised within a month or two.

"Let us pray that in a month or two, we will take over a bank where the majority block will be owned by Sarawakians," the report quoted him as saying.

A report from The Edge, citing sources, suggests that the Sarawak Government aims to become the largest shareholder by acquiring Boustead Holdings Bhd's entire 20% holding and a portion of Armed Forces Fund Board (LTAT)'s stake, potentially raising its total shareholding to around 30%, subject to regulatory approval. Currently, Sarawak holds a 4.8% stake in the bank through its investment arm State Financial Secretary Sarawak.

However, MIDF said it is unlikely for Bank of East Asia, which is Affin Bank's second-largest shareholder with a 23.93% stake, to pare down its stake.

"Bank of East Asia has held onto its stake for over 13 years, when Affin Bank’s balance sheet was in far worse shape. We note that Affin has made significant improvements in the past few years, and we believe BEA will likely want to reap these benefits.

"However, we are not ruling out anything as valuation will be a major determinant in our opinion," it said.

At the time of writing, shares in Affin Bank traded flat at RM2.50, resulting in a market capitalization of RM5.86 billion. The counter has gained 20.19% this year.