-  We downgrade our rating on Alliance Financial Group Bhd (AFG) to Hold from Buy, with an unchanged fair value of RM5.70/share. This is based on an unchanged fair P/BV of 2.0x, and ROE of 14.5% FY14F. Our downgrade is due to recent strong share price outperformance, which reduced the current upside to less than 15% (our in-house benchmark for Buy) to our fair value.

-  AFG’s 1QFY14 net earnings if annualised was 10.2% below our forecast, and 3.9% below consensus’ estimate. Net earnings came in below our estimates due mainly to net interest income.

-  Annualised loans growth retracted to 8.3% in 1Q, below previous quarter’s 12%. This came from softer working capital loans, which declined -3.7% QoQ in 1QFY14. The trend in working capital loans was matched by its SME segment (21.1% of total loans) whereby growth was flat at 0.7% QoQ in 1QFY14. We understand the business segment was affected by the unexpectedly cautious stance adopted by business borrowers. However, the company alluded that there had been a strong pick-up in the business segment since July 2013 with loans disbursement being utilised for investment, working capital and trade finance segments.

-  We are also positive on fee income portion of the noninterest income line, which posted healthy growth of 14.1% QoQ, indicating continuing extraction of fee income revenue. In addition, the investment and trading income line posted healthy profit still albeit at lower levels, which is positive considering the volatility experienced in the government bond market in endJune.

-  Given recent strong share price appreciation, we expect AFG’s share price to take a breather in the short-term. But, despite headline numbers coming as expected in 1QFY14, the trends are positive as it affirms strong growth in its fee income line, ongoing healthy investment and trading income, and reassurance on treasury strategies ahead. While SME and working capital loans growth was soft, this is mitigated by the recent strong trend and affirmation of rising growth momentum of its business and corporate loans.

-  Thus, we expect share price to sustain on earnings resilience in the quarters ahead. We foresee re-rating catalysts from:- (a) better non-interest income, which would provide further evidence of strong execution on its SME strategy and relatively better treasury operations; (b) sustained loans growth; (c) overall higher dividend; and (d) higher ROE.

Source: AmeSecurities