- We maintain BUY on Alliance Financial Group Bhd (AFG), with a higher fair value of RM5.70. This is based on a slightly higher ROE of 14.5% (from 14.3% previously) FY14F and an upgraded fair P/BV of 2.0x (from 1.9x).

- At the briefing yesterday, AFG alluded that its SME and working capital loans had been stronger in the March 2013 quarter, compared to the December 2012 quarter, due mainly to its more resilient SME customer base as well as increased efforts to expand growth. We view this positively given that the March 2013 quarter was a generally cautious quarter for the industry, with sentiments affected before general elections.

- In terms of recent trends, the company has seen its trade finance segment hit a new record month in January 2013, and more positively, trade finance business has continued to see a rising trend in the following months. Forex business has also benefitted from recent rates volatility in May. Looking ahead, the company is targeting overall loans growth in FY14F to come in better than the 13% growth in FY13 (our FY14F forecast: 14%). In addition, the company expects to manage NIM more effectively through proactive asset liability management, and higher yielding auto, personal loan business. Besides this, given stronger economic outlook ahead, AFG hinted that it may now be more comfortable in raising LDR ratio.

- The company’s collective assessment rate (collective assessment balance as a percentage of gross loans less individual assessment) has improved to 1.24% in endMarch 2013, from 1.32% a quarter ago in end-December 2012, and 1.56% a year ago in end-March 2012. This is attributed to continuous granular improvement in the five-year rolled forward data, which depends on the latest recoveries and sustenance of vintage loans. The company hinted that asset quality remains strong ahead.

- From the briefing, we sense that AFG continues to enjoy good momentum from its smaller SME business, with steady wins in deposit, loans as well as fee income. In addition, its focus on the smaller SME customer base (rather than larger corporate) is now starting to yield results from a resilient SME and working capital growth, with steady increase in fee income base.

- With high CET1 at 10.2%, we now forecast 44% net dividend payout ratio or net dividend yield of 3.5%, which should underpin share price performance. We expect 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