Alliance Financial Group - MARKET PERFORM - 24 May 2012

Period   4Q12/FY12

Actual vs. Expectations

FY12 PAT of RM479.4m was within the consensus’ forecast (103%) and that of ours (105%). 

Dividends  No dividend was declared.

Key Result Highlights

4Q12 net interest income contracted 1.2% QoQ, despite a positive growth in gross loans of 3.4% QoQ.  The main culprit was due to NIMs compression (declined 5bps to 1.78% in 4QFY12 vs. 1.83% in 3QFY12). This is because the group’s strategy in driving growth in its mortgages loan book has contributed to the lower asset yields apart from rising funding cost.  

As at end-Mar12, gross loans stood at RM25.0b (+3.4% QoQ; +11.3% YoY), which was within our full year loan growth forecast of 12%. The total deposits grew 4.7% QoQ to RM34.3b resulting in a lower loan/deposit ratio at 75.8% (vs. 3Q13: 77%).

FY12’s non-interest income of RM320.2m was +42% YoY driven by treasury gains. This was the key factor for the solid YoY growth rate in the result.

Gross impaired loans sustained at RM601m with the gross impaired ratio improving to 2.4% (from 3.3% in FY11).  Loan loss coverage meanwhile hit a high at 108.5%. The full-year RM13m provisioning represents a credit charge rate of only 5.2bps in FY12.

Cost was contained at a cost-to-income ratio of 47% in the year.  In summary, the 13.6% ROE achieved was in line with management’s guidance.

Outlook  We believe AFG is among the most defensively positioned banks in the sector, especially in a slowdown environment over the next 12 months where its credit cost is likely to outperform the peers considering lower levels of gross new NPL formation and aggressive provisioning in the past.

Change to Forecasts

We are maintaining our FY13E PAT of RM522.0m.

Rating  MAINTAIN  MARKET PERFORM

DBS has clearly stated that it has no intention to increase its existing stake in AFG.  Together with an optimistic earnings expectation (EPS growth of 8.8% for FY13), AFG’s current headline ROE of 14.2% appears justified to command a 1.6x P/BV valuation (our targeted multiple), which is +1SD of its historical P/BV band.  As such, we believe the share price has already factored in the strong earnings growth trend.

Valuation   We have lowered our target price to RM3.70 base on a lower targeted P/Bv multiple of 1.6x (cut by 0.2x) and a FY13 BV of RM2.33.

Risks  Tighter lending rules and a margin squeeze.

Source: Kenanga