Near-term strain and long-term gains expected for Aeon Credit

Aeon Credit Service Malaysia Bhd (Aeon Credit) has ended their financial year 2024 (FY24) results with a net profit of RM424 million which represents a 2 per cent growth from the previous year (y-o-y).

In results note on April 9, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) reported that the group’s FY24 net profit was within expectations as it met both theirs and consensus fullyear estimates.

Compared to the previous year, the group’s FY24 net interest income has increased by 18 per cent on the back of a 13 per cent increase in gross financing receivables alongside an 82 bps rise in net interest margins (NIMs).

“Cost-to-income ratio was somewhat stable at 34.2 per cent as higher expenses could be tied to the higher transaction volumes.

“On the flipside, impairments also rose with credit cost coming at 4.93 per cent as staging requirements were more stressed during the year,” the research arm shared.

And finally, Aeon Credit’s net profit was further dragged when it reported losses from associates in relation to its digital bank (digibank), Aeon Bank.

Looking ahead, Kenanga Research guides that Aeon Credit will likely experience near to medium-term strains coming from its 50 per cent owned Aeon Bank which is slated to launch by May 2024.

Aeon Credit has reported Aeon bank’s first impact to be RM16.6 million in associate losses and has guided that they are forecasting the digibank to incur a net loss of RM120 million per annum.

According to Kenanga Research, this may run higher to RM140 million per year in fixed expenses which translates to around RM60 million to RM70 million associate losses per annum for AeonCr.

The digibank is expected to be loss making as it progressively builds up its presently lacking revenue streams which would strain it’s near to medium-term prospects.

“The lower earnings prospects may also hamper return on equity (ROE) with the group eyeing circa 13 per cent for FY25,” the research arm added in a separate company update on April 12.

On the bright side, Kenanga Research is hopeful that Aeon Bank will be able to tap into a captive client base from Aeon Mall, accelerate its expansion and break even within its first four years of operations.

Note that the Aeon Group is working towards consolidating its Aeon Mall, Aeon Credit and Aeon Bank platforms into a single platform dubbed the, “Aeon Living Zone”.

In the long-term this new comprehensive ecosystem is expected to boost customer acquisition says the research arm.

Despite the near to mediumterm strains from the new Aeon Bank venture, Kenanga Research guides that they continue to believe in Aeon Credit’s fundamentals as they stand out against conventional banking institutions with ROE prospects of circa 15 per cent with more modest dividend yields of circa 5 per cent.