KUALA LUMPUR (Jan 15): Affin Bank Bhd's (KL:AFFIN) ambitious branch expansion plan is expected to keep its cost-to-income ratio (CIR) elevated for the next few years, according to CGS International, which is reiterating its 'reduce' recommendation on the bank.

In a research note on Wednesday, CGS said Affin plans to expand its branch network from 130 in 2024 to 146 by the end of this year, and to 180 by 2028, with the additions to be focused particularly in Penang, Johor, Sabah and Sarawak.

While the expansion is expected to lead to stronger loan and fee income growth in the longer term, the bank will have to bear additional recurring operating expenses before realising substantial new revenue.

"With this, we estimate its CIR could remain elevated, at above 60% to 70% in the next two to three years, higher than the sector average of around 45% to 50% over the same period. We project its CIR to stay high at 65% to 68% in the financial year ended Dec 31, 2024 (FY2024)-FY2026, although this would be an improvement from the 71.6% recorded in FY2023," said CGS.

It also noted that Affin has set aggressive financial targets for FY2028, including a pre-tax profit of RM1.8 billion (a 37% compound annual growth rate from FY2024 to FY2028), and a return on equity (ROE) of 12%, triple the 4% that the bank achieved in FY2023.

But CGS' estimates are more conservative, projecting a pre-tax profit of RM900.8 million and an ROE of 5.5% for FY2028. Affin's other FY2028 targets include a Casa (current account savings account) ratio of 35% and total loans of RM116 billion.

Hence, CGS maintained its 'reduce' call on Affin, due to concerns about the elevated CIR and weak ROE projected for FY2024 to FY2026.

The research house also believes the stock is overvalued, trading at a forecast FY2025 price-earnings ratio of 13.3 times, the highest in the banking sector, while its forecast FY2025 ROE of 4.5% is the lowest among its peers.

"The potential upside risks to our call would be a strong uptick in net interest margin and fee income growth in FY2025 to FY2026," CGS said, as it maintained its earnings per share forecasts for FY2024 to FY2026, and its target price of RM2.76 for Affin.

"We prefer Hong Leong Bank Bhd (KL:HLBANK) for exposure to the sector, due to its lower valuations and stronger ROE," the house added.

At the afternoon break on Wednesday, Affin was four sen lower at RM2.82, giving the group a market capitalisation of RM6.77 billion, while Hong Leong Bank was 10 sen higher at RM20, valuing it at RM43.35 billion.