Alliance Financial - Decent performance in FY12 BUY

- We are maintaining our BUY rating on Alliance Financial Group Bhd (AFG), with an unchanged fair value of RM4.40/share. This is based on FY13F’s ROE of 13.2% and consequently, a fair P/BV of 1.7x.   

- AFG’s net earnings at RM479mil for FY12 came in ahead of our forecast by 3.4% and consensus’ RM479mil by 1%. 

- Gross loans rose 3.4% QoQ in 4QFY12 and 11.3% in FY12, stronger than the targeted 8% rate. This was backed by robust growth of 16.3% QoQ in the business banking loans segment, which now accounts for 46.1% of total loans. We estimate a 13bps QoQ decline in NIM in 4QFY12. The lower NIM was mainly due to higher cost of funds, which came partly from bigger portion of fixed deposit funding in this quarter. 

- Fee income ratio came in at 28.1% in 4QFY12 vs. 25.5% in 3QFY12. This was backed by higher fee income portion. 

- Gross impaired loans have reversed the quarterly improving trend over the past five quarters, given  an uptick by 1.3% QoQ.  Gross impaired loans ratio was unchanged at 2.4% in 4QFY12 (3QFY12: 2.4%). Loan loss provision rose to RM23.6mil in 4QFY12 from RM10.0mil in 3QFY12, taking credit costs to 38bps from 17bps. Overall gross impaired loans remained mild, and credit costs still relatively low compared to historical trends. Loan loss cover was raised further to 108.5% in 4QFY12 from 107.6% in 3QFY12, marking the seventh consecutive quarter of QoQ improvement.

- AFG’s 4QFY12’s top line growth in terms of loans came in ahead of our expectations, but this was offset partly by lower NIM, which at this point seems to be due mainly to efforts to secure longer-term fixed deposit funding rather than any particular weaknesses in CASA. There were some upticks in impaired loans, but the upward trend is mild and is not alarming. Working capital impaired loans remains well contained. Overall, 4QFY12 was in line with expectations, but the positive thing to note is loans growth momentum is now picking up.  

- We expect the share price to rerate from here onwards based on:- (a)  confirmation of M&A, given that DBS has been given the approval to negotiate with one of the major shareholders of AFG’s direct substantial shareholders, Vertical Theme. We expect the M&A to provide a floor price to AFG; (b) evidence of better-thanexpected SME asset quality; (c) improved fee income; and (d) possible boost to book value from write-back in collective assessment rates.

Source: AmeSecurities