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This article first appeared in The Edge Financial Daily on June 5, 2017

Alliance Financial Group Bhd
(June 2, RM4.20)
Maintain reduce call with an unchanged target price of RM3.80:
We are positive on Alliance Financial Group Bhd’s (AFG) various initiatives like the launch of new product Alliance One Account (AOA).

AOA is an innovative product that allows borrowers to consolidate various financing under one account in Alliance Bank.

This would provide borrowers more convenience in managing their accounts and some savings on interest payments.

However, the bank expects the benefits of this to be realised in the longer term, such as a RM80 million additional revenue by the financial year ending March 31, 2022 (FY22).

For FY18, the company is targeting a return on equity of 10.5% (on business as usual or BAU), in line with our projected 10.4%.

Other key performance indicators for the company in FY18 are a mid-single-digit loan growth, five basis points (bps) expansion in net interest margin, cost-to-income ratio of less than 47% (BAU), and net credit cost of 30 to 35bps.

The bank expects to register net profit of above RM500 million in FY19, versus our forecast of RM592.5 million. Excluding restructuring costs, net profit for FY19 would be more than RM520 million, as guided by the bank.

With the strategic initiatives in place, AFG expects top line and bottom line traction to pick up in FY20, from 7% (BAU) in FY18 to 7%-10% in FY20 for revenue, from 8% to 9%-13% for pre-provisioning profit, and from 5% to 8%-14% for net profit.

Its FY20 net profit growth forecast is higher than our projected 5.1%. The group is eyeing net profit of more than RM650 million for FY20 to FY22 versus our projection of RM622.7 million for FY20. Based on the above, our projected net profit for FY18 to FY20 is quite close to the bank’s expectations.

While we are positive on the various initiatives undertaken, we think that we would only see material benefits from these in the longer term (FY20 and beyond).

At this juncture, we are still concerned about the upturn in the credit cost cycle and weak loan growth, which are the reasons why we retain our “reduce” call on AFG. — CIMB Research, June 1

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