Alliance Financial - Staying the course Buy

- Despite external uncertainty, AFG set a steadfast tone at the Analysts’ Briefing last Friday. The company continued to emphasise on its niche growth strategy in the Consumer and Business banking space, with new initiatives being launched on transactional banking, treasury sales, Bancassurance and wealth management. 

- Loans growth is expected to be sustained at close to FY12’s level of 11.3%. NIM is likely to be under competitive pressure, largely due to consumer-related products such as mortgage. Thus, it expects NIM to be at best being sustained at 2.5% in FY13F (FY12: 2.51%, FY11: 2.69%).  

- Non-interest income had well with investment and trading income of RM117mil in FY12F having almost doubled from FY11’s RM56mil. More importantly, the company view this portion as sustainable, as these are not considered as proprietary trading in nature. This bodes well for fee income ratio, which had came in above expectations given the big jump to 26.8% in FY12 from 20.8% in FY11. The company believed it is on a fast track to achieve its longer term target of 30% for fee income ratio. The new areas of growth would be commission fees (related to commitment fees on wholesale loan), and forex spreads from third party customer hedging activities. 

- Impaired loans are sustained, with the recent uptick largely related to selected SME loans in the Northern region. This led to the Northern region’s impaired loans rising to RM135mil in 4QFY12 from RM123mil in 3QFY12. The company alluded to those already being largely provided for. Credit costs are expected to be well contained in FY13F (FY12: 15bps). 

- The company hinted its SME and business loan customers are generally cautious since nine months ago, with some withdrawing from inventory stocking up and capex investments given ongoing uncertainties. Despite this, we understand that some of the bank’s SME customers are now looking at opportunities given the slowdown while others are more positive in terms of regional business opportunities. With renewed external uncertainty, a possible new macro risk area would be exports, but the company does not foresee any major impact in terms of domestic impaired loans. Given that DBS is likely to emerge as a new shareholder, AFG foresees new opportunities for trade finance and new loans growth in the Iskandar region in Johor. Maintain BUY.   

Source: AmeSecurities