KUALA LUMPUR: Affin Bank Bhd's controlling stake transfer in Affin Hwang Asset Management Bhd (Affin Hwang AM) to CVC Capital Partners Asia Fund V for RM1.4 billion price tag is seen as 'attractive' by Hong Leong Investment Bank Bhd (HLIB Research).
The bank-backed research firm said the monetisation of Affin Hwang AM could reflect a frontload of 10 years' worth of the assessment management's healthy profit.
"However, there is an earnings gap that needs to be filled and return on equity (RoE) will be negatively affected," said analyst Chan Jit Hoong in a research note recently.
He said Affin Bank would likely be left with slews of business levers to explore and potentially reward shareholders with special dividends as the deal is expected to be complete in the third quarter of 2022.
HLIB Research said Affin Hwang AM's high disposal value indicated at 2.8 per cent price-to-asset under management (P/AUM), representing a premium compared to its 2014 acquisition P/AUM of 1.8 per cent and industry mean merger and acquisition valuation of 2.2 per cent.
"Affin Bank is poised to pocket a divestment gain of RM1.0 billion and see its Common Equity Tier 1 (CET1) ratio bumped up by 2.9 percentage point to above 16 per cent."
However, HLIB Research said Affin Bank could lose between 20 per cent and 30 per cent earnings contribution from Affin Hwang AM, which could potentially reduce FY23 RoE by up to 150 basis points (bps).
"Affin Bank's main intention is to plough back the sale proceeds to drive its core banking business.
"However, we think this is a slow way to plug the gap left by Affin Hwang AM. Hence, ROE could be hit by the enlarged equity base, resulting from the RM1.0 billion disposal gain (estimated to be 40 bps)."
Nevertheless, it added that Affin Bank did not rule out the potential for special dividends, which can help ease ROE pressure.
"We calculate every RM100 million payout or 2.6 per cent dividend yield, may lift RoE by 4.0 bp."
Separately, Affin Bank is also redeeming its RM1 billion medium-term notes (MTNs) with a high coupon rate of 5.45 per cent, translating to a cost saving of RM55 million that would enhance RoE by about 35 bp.
"We estimate the overall net negative impact to our FY23 profit forecast is 13 per cent to 24 per cent, while RoE may fall by 105bp to 155bp, taking into consideration the loss of income from Affin Hwang AM, cost-saving from the RM1 billion MTNs redemption, and enlarged equity base."
HLIB Research has retained a Buy call for Affin Bank with a target price of RM2.25, citing that the bank's risk-reward profile would still be skewed favourably to the upside as the disposal of Affin Hwang AM and the potential special dividends are re-rating catalysts.