- We are maintaining BUY on Alliance Financial Group Bhd (AFG), with an unchanged fair value of RM5.40/share. This is based on an unchanged fair P/BV of 1.9x, and ROE of 14.3% FY14F. \

- AFG’s excellence in SME service has just been recognised, with The Asian Banker awarding AFG as the Best SME Bank in Asia Pacific recently. This provides strong testimony to AFG’s execution, as the bank was pitted against 160 contestants in Asia Pacific, the Middle East and Africa. We understand that the process of selection included rigorous interviewing of key management personnel involved in the SME segment.

- One of the contributing factors to the award is AFG’s strong relationship management of its SME customers. The award confirms AFG is on track to achieve its stated ambition to be the best SME bank in Malaysia.

- AFG’s share price had been flat in the past few months. This may be due to flat SME loans growth, despite a high target of 17% to 18%. This is due to the prevailing cautious sentiments among its customers. However, we believe this is a mere timing issue, and expect loans growth to pick up in 2H13.

- The other concern may be that the three consecutive quarters of strong loan loss recoveries could reverse. However, the company is maintaining a normalised credit cost guidance of 20bps, which is already reflected in our forecasts.

- AFG has also hinted that it is unlikely to be involved in any merger and acquisition with any particular investment banking business at this stage. This is positive for group common equity ratio, which remains high at 11.9%.

- AFG’s foreign shareholding had risen significantly to 36.6% as at end-February 2013 from 29.5% as at endDecember 2012. We estimate that the most recent high in terms of foreign shareholding was at 40% in June 2007. The most recent low was at 24.7% in June 2010.

- We estimate that the net number of shares acquired by foreign shareholders was 26mil in the first two months of 2013, and 84mil in 2012. However, the net buying trend is probably to regain some ground, in view of the large net selling by foreign shareholders between 2008 and 2010, which totalled RM184mil for the three years.

Source: AmeSecurities