Investment Highlights

• We maintain our HOLD rating on Alliance Financial Group (AFG) with a higher fair value of RM3.90/share (previously RM3.80/share). Our revised fair value is based on higher FY18 ROE of 9.3% (previously 9.0%), leading to a P/BV of 1.1x. We fine-tune our FY18/19 estimates by 2.4%/-1.4% after revising our estimates for operating income and our CI ratio assumptions.

• 4QFY17 net profit growth declined 9.5%QoQ to RM117mil, attributed to lower net interest income (NII) from an increase in funding cost as well as a drop in client-based fee income of 9.6%QoQ (lower trade fees, fx gains and banking services fees) and higher OPEX. Cumulative earnings for 12MFY17 of RM512mil fell by 1.9%YoY, contributed by higher provisions and a marginally higher OPEX of 0.4%YoY which offset the increase in net income. 12MFY17 earnings were within expectations, making up 102.2% and 95.5% of our and consensus estimates for FY17 earnings respectively.

• For FY18, the group provided an update to the expenses for investment and indicated that RM94mil will need to be incurred to offer new value propositions (technology-based products/services) to its customers. This included scaling up of sales force, expenses on IT, marketing and restructuring expenses under Phase 1. This will raise its OPEX, resulting in a short-term negative impact to its earnings in FY18 to provide for longerterm benefits to the group's revenue.

• Loan growth decelerated to 1.5%YoY in 4QFY17, underpinned by slower retail and SME loans. This was slower than our loan growth expectation of 3.9% for FY17.

• 4QFY17 saw the group's NIM slipped by 1bps QoQ to 2.30% due to higher funding cost. For 12MFY17, NIM expanded 11bps YoY to 2.26%, contributed by higher gross interest margin and decline in funding cost. The group continued to recorded a positive JAW of 2.8%. 12MFY17 CI ratio improved to 47.1% compared to 48.4% in 12MFY16, close to our estimate of 48.0%.

• Absolute impaired loans balance inched up marginally by 0.2%QoQ, underpinned by higher impaired loans for purchase of non-residential property and working capital loans. GIL ratio was stable at 1.0% similar to the preceding quarter. Net credit cost for 12MFY17 was 0.24% (12MFY16: 0.12%), in line with our assumption for FY17. The increase in credit cost was due to higher collective allowances and lower recoveries.

• Outstanding stock of R&R loans declined by RM51.4mil YoY to RM81.2mil, representing a marginal 0.2% of the group's total loans.

Source: AmInvest Research - 1 Jun 2017