Possible insurance JV disposal seen having neutral impact on Affin Bank

This article first appeared in The Edge Financial Daily, on September 10, 2019.
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Affin Bank Bhd
(Sept 6, RM2.04)
Maintain hold with an unchanged target price (TP) of RM2.20:
Bloomberg has reported that AXA Insurance and Affin Bank Bhd are mulling the possibility of disposing of their insurance joint venture (JV) — AXA Affin Insurance. Affin Bank Bhd has a 49.9% stake in AXA Affin General Insurance, and a 51% stake in AXA Affin Life Insurance. The potential disposal consideration for AXA Affin General and AXA Affin Life stand at US$500 million (RM2.09 billion) and US$150 million respectively.

 
Assuming that the potential disposal materialises, the impact on earnings is a marginal profit before tax (PBT) contribution from the insurance unit, which is estimated at less than 10% of Affin Bank’s PBT. A potential bancasurance distribution agreement to distribute the products through Affin Bank branches may help to partly offset the loss of insurance earnings post-disposal. Based on the speculated combined disposal pricing of US$650 million, Affin Bank would net an estimated RM1.4 billion in disposal proceeds based on its stake and potentially book in a gain on disposal of RM600 million.

Based on the potential disposal price quoted by Bloomberg, this could imply that AXA Affin General and AXA Affin Life are valued at 1.78 times and 1.84 times price-to-book value (PBV) respectively, which are still at a discount to average domestic insurance merger and acquisition-transacted valuations of around 1.9 times to 3.6 times PBV. We are of the view that the disposal is neutral in general, as the impact on recurring earnings is negligible while the disposal could lead to an enhancement of group Common Equity Tier 1  by an estimated 2.5 percentage points.

We maintain “hold” with an unchanged TP of RM2.20 (0.5 times forecast 2019 PBV; return on equity: 5.6%). The group’s earnings have been held up by write-backs while core operating performance (loan growth, fee income, net interest margin and asset quality) remains weak. — UOB Kay Hian, Sept 6