- We maintain our HOLD rating on Alliance Financial Group Bhd (AFG), 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.

- AFG’s annualised 2QFY14 net earnings were 13.3% below our forecast, and 7.4% below consensus estimates. Main variances to our forecast were the net interest income and non-interest income lines, which were offset by an unexpected positive write-back in the loan loss provision expense line.

- Annualised loans growth was better at 12.4% in 2QFY14, compared to 8.3% in 1QFY14, driven mainly by a robust consumer growth. Business loans growth was flat and in line with expectations given the earlier indications of a more cautious stance adopted by SME owners due to currency volatility, perceptions of costlier materials caused by inflation, and slower domestic economic growth.

- The company reported an unrealised revaluation reserve of RM65.2mil in 2QFY14, compared to RM86.9mil in 1QFY14 (4QFY13: RM115.4mil). This is commendable, considering the challenging treasury environment.

- AFG’s 2Q was relatively more subdued but this was not a major surprise given the earlier indications of a softer business segment due to the cautious stance adopted by borrowers.

- However, underlying 2Q operations was positive due to a pick-up in loans growth, with the consumer segment filling the gap caused by the lull in the business loans segment.

- In addition, treasury operations were commendable and recorded good profitability despite the challenging environment during the quarter.

- Asset quality also improved. We expect share price to sustain as 2Q results provided evidence of good asset quality, which means its business banking and consumer banking platforms are positioned for growth opportunities ahead.

- We foresee rerating catalysts from:- (a) better noninterest income; (b) sustained profitability in treasury operations; (c) stronger loans growth; (d) higher dividend; and (e) higher ROE.

Source: AmeSecurities