Investment Highlights

• We maintain our HOLD rating on Alliance Financial Group Bhd (AFG) with an unchanged fair value of RM3.90/share. Our fair value is based on FY18 ROE of 9.3%, leading to a P/BV of 1.1x. We make no changes to our earnings estimates.

• The group reported a 1QFY18 net profit of RM135mil which grew modestly by 1.9%YoY. 1QFY18 saw a total income growth of 6.3%YoY partially offset by higher operating expenses (OPEX) and provisions for loan impairment. 1QFY18 earnings were within expectation making up 27.6% and 26.8% of our and consensus estimates respectively.

• Recall, the group will be incurring expenses to offer new value propositions (technology-based products/services) to its customers. This included scaling up of sales force, as well as expenses on IT, marketing and restructuring which will raise its OPEX in the near term to create new revenue streams. Total cost of investment has be reduced to RM90mil from RM94mil guided in the last briefing. In 1QFY18, RM2.2mil out the RM90mil has been expensed. This leaves the balance to be expensed over the remaining quarters of FY18 with the highest expenditure to be incurred in 3QFY18.

• Loan growth remained lacklustre at 1.3%YoY in 1QFY18. This was due the group's focus in growing higher risk adjusted (RAR) loans to improve its NIM which led to a high attribution of lower RAR loans (mortgage, business premises loans and HPs). The group's loan growth was much slower than our expected 5.0%YoY expansion for FY17.

• 1QFY18 saw the Group's NIM improved by 2bps QoQ to 2.32% due to higher asset yield from its focus in higher RAR loans while funding cost was stable.

• On YoY basis, the group recorded a positive JAW of 1.9%. 1QFY18 CI ratio was lower at 45.6% compared to 46.5% in 1QFY17. Nevertheless, we expect the group's CI ratio to rise to 50.0% eventually for FY18 once further expenses have been incurred for its investments.

• Absolute impaired loans balance rose by 10.6%QoQ, underpinned by higher impaired loans for purchase of residential and non-residential property as well as personal loans. GIL ratio inched up to 1.1% from 1.0% in the preceding quarter. Net credit cost for 1QFY18 was higher at 0.31% (1QFY17: 0.19%), slightly above our assumption of 0.30% for FY18. The increase in credit cost was due to higher provisions for the group's personal loans.

Source: AmInvest Research - 30 Aug 2017