Alliance Financial Group Bhd
(Feb 17, RM4.82)
Maintain hold call with a higher target price (TP) of RM5. We roll over our TP from RM4.90 to RM5, which is based on an implied 1.6 times estimated calendar year 2016 (CY16E) price-to-book value target multiple (based on a CY16E return on equity of 12.9%). We keep our estimated financial year ending March 31, 2015 (FY15E) to FY17E forecasts unchanged.  At this level, we do not foresee new rerating catalysts for Alliance Financial Group Bhd (as the outlook will moderate in 2015), though the group has its own niche, targeting consumer and small and medium enterprise customers, and growing selectively in the wealth management space.

Alliance Financial shares offer a potential 4.2% dividend yield (based on a 60% payout ratio). The bank is a well-managed one in terms of asset quality and with a well-capitalised balance sheet. Hence, we maintain our “hold” rating. Downside risks include aggressive competition for deposits, net interest margin (NIM) pressure and additional tightening measures on consumer loans. The company’s nine-month cumulative financial period (9MFY15) core net profit of RM418.5 million (4.7% year-on-year [y-o-y]) is in line with expectations.

The favourable results were underpinned by a 6.6% growth in operating income, driven primarily by fund-based income growth (8.7% y-o-y), while non-interest income (fee income ratio at 26.3%) turned out to be flat y-o-y. No dividends were proposed in the third financial quarter ended Dec 31, 2015 (3QFY15). Despite a continuous rise in the cost of funds to 2.49% in 9MFY15 (FY14: 2.43%), NIM remained flat at 2.21% (9MFY15) versus 2.2% in FY14.

The 9MFY15 credit recoveries (corporate accounts), albeit lesser than 9MFY14, underpinned a net credit cost of 6.3 basis points (bps) vis-à-vis the normalised credit cost of 20.8bps (arising from higher collective allowance).

There were a couple of one-offs during 9MFY15, a RM21.6 million gain from a land sale, a RM10 million from bancassurance (banca) fee, and a RM10.6 million mutual separation scheme cost (versus a RM30 million banca fee from Manulife Holdings Bhd and RM22.3 million voluntary separtion scheme  cost in 9MFY14). — AffinHwang Capital Research, Feb 17

This article first appeared in The Edge Financial Daily, on February 18, 2015.