Alliance Financial - Solid improvement in fee income BUY

- We are maintaining BUY on Alliance Financial Group Bhd (AFG), with an unchanged fair value of RM5.40/share. This is based on an unchanged fair P/BV of 1.9x, and ROE of 14.3% FY14F.  

- AFG’s SME segment (21.7% of total loans) was slightly softer, with a flat growth of 0.8% QoQ in 3QFY13 (2QFY13: 6.4% QoQ) due largely to an impact from the year-end holidays. Annualised SME loans growth was 10.4%. 

- In addition, the company alluded to some level of cautiousness among the SME customers over the past two months. However, the company is maintaining loans growth for this segment at above 10%. Thus, we remain comfortable with the SME segment’s growth. 

- Fee income did well with an 11.4% QoQ jump to RM46.4mil in 3QFY13, from RM41.6mil in 2QFY13. The only one-off item would be about RM2mil in fees in relation to participating in a syndicated loan, but other than that, we understand that most of the fee income of RM46.4mil is recurring in nature. 

- The increase in fee income came mostly from commissions in transaction banking and foreign exchange fees. The company expects these to be sustainable. This is positive and indicates a new higher elevated level for AFG’s fee income. 

- Residential mortgage segment’s NPL has shown some upticks in recent quarters, but the company clarified that there were largely due to a corresponding increase in its mortgage loan portfolio, which is reassuring. Gross impaired loans ratio for this segment is thus stable and unchanged at 1.9%. 

- We remain positive on the company following the briefing. Fee income appears to be sustaining at new higher levels, close to the RM46mil/quarter recorded in this quarter vs. RM41mil to RM42mil in earlier quarters. Apart from this, we understand that the outlook for investment and trading income remains healthy. 

- The latest quarter affirms AFG’s ability to harvest higher fee revenue as its SME bank branding improves further. This would be in line with its stated ambition to differentiate itself, via unrivalled customer experience, to be the best SME bank in Malaysia. We foresee rerating catalysts from:- (a) better non-interest income, which would provide further evidence of strong execution  on its SME strategy; (b) sustained loans growth; (c) higher ROE. 

Source: AmeSecurities