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Issuer Credit Research

Issuer Flash: AFFIN Bank Berhad

Issuer: Affin Bank | Document: Issuer Flash | Date: 2026-09-04 | Event: Q2 2026 Results

Report date: 2026-09-04 Event date: 2026-08-14 Event title: 2Q2026 Results

1. Flash Conclusion

AFFIN's 1H2026 results preserve the broad thesis of an improving Malaysian mid-tier bank, but make it more conditional. Core operating momentum was sound: net income rose 12.2% year on year to RM1.30bn, net interest income increased 11.9% to RM468.5m, and operating profit before allowances rose 33.5% to RM481.9m. Loans, advances and financing expanded 13.6% to RM84.1bn, while the issuer reported a gross impaired-loan (GIL) ratio of 1.82% and LLR of 116.80%. Those reported indicators do not by themselves point to immediate stress, but do not resolve emerging-risk questions.

The offset is that profitability after risk costs weakened. Profit before tax (PBT) fell 3.3% to RM346.1m in 1H2026, while credit allowances increased 63.6% to RM84.1m. This does not establish a broad deterioration in the loan book: the materials reviewed do not disclose Stage 2 migration, arrears, new impaired loans or the portfolio origin of the Group-level allowance increase. It does, however, mean the prior expectation that higher earnings would translate smoothly into stronger internal capital generation is not yet proven. Islamic Banking is a concrete example of the pressure: its PBT fell 27.8% to RM133.9m, principally because impairment allowance increased by RM68.2m.

Funding quality is still the central reservation. Customer deposits grew 3.0% to RM81.1bn and the CASA balance rose 2.2% quarter on quarter to RM21.6bn, but loans grew far faster and the CASA ratio declined to 26.69% from 28.21% a year earlier. This combination is more important for senior creditors than the absolute deposit balance alone, because it may constrain margin quality and capital generation if it persists. CET1 of 12.62% and LCR of 152.3% remain disclosed at material levels, but both were lower year on year. The RM400m AT1CS issuance in July adds regulatory-capital capacity, not common-equity capital; it should therefore not be read as a solution to the weaker CET1 trend. The result leaves the prior credit view cautiously constructive but not upgraded: AFFIN's operating franchise is improving, while the durability of its funding mix and the source of higher provisions need further confirmation.

2. 1H2026 Results: Operating Momentum, but Lower PBT

AFFIN's unaudited statements show 2Q2026 Group PBT of RM165.2m, versus RM179.8m in 2Q2025, and 1H PBT of RM346.1m, versus RM358.0m. Net profit after tax was RM127.5m in the quarter and RM263.0m in the half year, compared with RM143.5m and RM267.6m respectively in the comparable periods. The resulting decline is smaller than the underlying growth in operating income would suggest. The official press release attributes the 12.2% increase in 1H net income to higher net interest income and net fee and commission income; higher operating expenses were limited to 2.6%, and operating profit before allowances was RM481.9m.

The adverse bridge is the allowance metric disclosed in the issuer's 14 August press release. It rose 63.6% year on year to RM84.1m, absorbing the improvement in pre-provision earnings. This figure is used here as the issuer's stated earnings bridge; the presentation and press release do not provide the further reconciliation needed to equate it with every credit-impairment line in the statutory quarterly statements. It is evidence of higher current-period risk cost, not by itself proof of a systemic asset-quality break. Management's reporting still shows a low GIL ratio and disclosed LLC/LLR ratios, but the sources reviewed do not explain whether the increase reflects conservative provisioning for specific exposures, seasoning in high-growth portfolios, or a more generalized normalization of credit cost.

Islamic Banking merits closer attention. Its 1H PBT fell to RM133.9m from RM185.4m, with the issuer citing a RM68.2m higher impairment allowance and RM27.0m higher operating expenses, partly offset by RM43.7m more net income. It identifies an area where stronger revenue did not translate into stronger profit after risk costs, but does not establish weakness in Enterprise Banking or retail portfolios.

3. Funding, Asset Quality and Capital Read-Through

Growth remains meaningful but is not yet self-validating. Loans, advances and financing grew 13.6% year on year to RM84.1bn. The issuer identifies Enterprise Banking (+17.3%), Community Banking (+9.8%) and Corporate Banking (+22.4%) as the main sources; housing loans grew 7.5% and auto finance 4.3%. Such broad expansion supports the earlier view that AFFIN has a functioning franchise across several banking businesses. But deposit growth of 3.0%, to RM81.1bn, did not match the pace of loan growth. The CASA balance's quarter-on-quarter increase is welcome, yet the year-on-year decline in the CASA ratio to 26.69% means a larger low-cost deposit base has not been demonstrated.

This is why the credit conclusion should not rest solely on an LCR of 152.3%. The reported ratio indicates substantial regulatory liquidity coverage, but it does not answer whether growth is being funded at an increasingly expensive marginal cost. The main downside path remains an interaction rather than a single ratio: loans continuing to outgrow deposits, CASA failing to recover, and higher provisions or weaker margins reducing retained earnings. Neither NIM nor the composition and cost of new deposits was confirmed in the materials reviewed, so the flash does not claim that this path has occurred. It identifies the combination that would change the present cautiously constructive view.

Reported asset quality remains a support, but needs to be read with the allowance trend. GIL improved marginally from 1.83% a year earlier to 1.82% at June 2026. The issuer's 2Q26 presentation reports LLC of 71.16% and LLR of 116.80%; the materials reviewed label those ratios but do not provide a definition that permits a more specific scope statement in this flash. Alongside the 1.82% GIL ratio, they do not by themselves point to immediate balance-sheet stress. They cannot, however, resolve whether new risk is forming in the faster-growing books. Leading indicators—Stage 2 exposures, arrears, rescheduling, new impaired loans and concentration by portfolio—were not confirmed. Bondholders should therefore treat the high allowance line as a monitoring signal alongside, rather than in contradiction to, the reported GIL and issuer-labelled ratios.

CET1 and LCR remained reported at 12.62% and 152.3%, respectively, but both were lower year on year from 13.38% and 171.1%. This flash does not assess regulatory-minimum headroom or total-capital/RWA context. The July additional RM400m AT1CS issue may support total regulatory capital and market access, but it does not directly replenish CET1 and its instrument-specific loss-absorption, coupon and call terms were not reviewed here. The relevant next question is whether ongoing earnings and RWA management stabilize common-equity capital as lending expands—not whether AT1 issuance alone keeps a total-capital ratio above minimum requirements.

4. What To Watch Next

The next results should be assessed first for loan growth, deposit growth and CASA. A sustained rise in CASA, deposit growth moving closer to lending growth and continued NII expansion would support the view that funding-mix weakness is temporary. Conversely, a renewed fall in CASA or continuing divergence would imply increasingly funding-cost-intensive growth.

Second, investors should seek the explanation for the RM84.1m 1H allowance expense and the weaker Islamic Banking result. The key missing evidence is movement in Stage 2 loans, arrears, rescheduling, new impaired loans, write-offs and portfolio-level asset quality, especially in faster-growing Enterprise and Corporate Banking. Until those figures are available, the allowance increase should be treated as an unresolved earnings-quality issue rather than labelled one-off or structural.

Third, CET1, RWA growth and the composition of regulatory capital require attention. The public disclosure confirms a lower year-on-year CET1 ratio and a July AT1CS issue, but does not confirm management's CET1 target, dividend response, RWA controls or the terms of individual capital instruments. A recovery or stabilization of CET1 alongside controlled credit costs would reinforce the credit profile; reliance solely on additional AT1/Tier 2 to support growth would be a weaker outcome for senior creditors.

5. Sources