- We maintain 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 net earnings for FY13 is in line with our forecast, but 3.2% above consensus’ RM523.3mil for FY13F.

- Gross loans grew 3.9% QoQ in 4QFY13, stronger than 3QFY13’s 2.1% QoQ increase. Working capital segment (22.2% of total loans) has surprisingly picked up to +2.8% QoQ in 4QFY13, in contrast to a -4.7% QoQ decline in 3QFY13.

- The trend was similarly reflected in terms of its loans by holders, whereby the SME segment (21.4% of total loans) registered a significantly higher growth of 2.4% QoQ in 4QFY13 compared to flat 0.8% QoQ rise in 3QFY13.

- We are positive on the unexpected pick-up in SME loans growth given indications of cautious sentiments before the general elections.

- Non-interest income expanded at a fairly strong rate of 7.8% QoQ (excluding one-off gain of RM23.2mil from sale of associate). The rise was underpinned by a higher investment and trading income.

- More importantly, the fee income portion of non-interest income remained stable at RM44.7mil in 4QFY13, compared to 3QFY13’s RM46.4mil. Recall that 3QFY13’s fee income jumped 11.4% QoQ from RM41.6mil in 2QFY13, with the company hinting that about RM2mil is one-off related to syndication fees, while the rest of the increase is sustainable. The 4QFY13 is further proof of overall rising trend in fee income.

- Fee income ratio improved to 26.2% (excluding the gain on sale of associates) in 4QFY13, higher than 3QFY13’s 25.3%.

- AFG’s 4QFY13 is positive with the SME and working capital loans coming in unexpectedly stronger, given earlier indications of continuous cautious sentiments before the general election. In addition, fee income has sustained well in 4Q. We foresee re-rating catalysts from:- (a) better non-interest income, which would provide further evidence of strong execution on its SME strategy; (b) sustained loans growth; (c) overall higher dividend; and (d) higher ROE.

Source: AmeSecurities