- We maintain our HOLD rating on Alliance Financial Group Bhd (AFG) with a higher fair value of RM5.10/share (from RM5.30 previously). Our fair value is based on a 13.8% (vs. 13.4% previously) ROE for FY15F, leading to a fair P/BV of 1.8x.

- We expect the SME segment to sustain strong growth momentum, given that the turnaround time for approval process has now been upgraded substantially since end-2013. Recall that the SME segment achieved gross loans growth of 17% YoY in FY14.

- The faster turnaround time is mainly due to AFG’s credit process re-engineering initiative to streamline processes from origination to disbursement for both consumer and SME lending. This has resulted in a significant reduction in processing time and improvement in sales productivity and service delivery.

- However, we believe that AFG’s consumer mortgage lending business is relatively softer – in line with industry trends. This is likely due to the lending measures put in place.

- Despite the recent rate hike, AFG is maintaining its target NIM compression of 15bps YoY for FY15F. This is mainly due to the ongoing effects of replacement of older better-yielding assets with the lower-yielding new loans.

- As for non-interest income, we expect the forex income to reflect industry’s slow trade financing trends. With slower lending activities on the consumer division overall, we believe fee income is also likely to remain soft. We expect the treasury division to stabilise given that MGS yield trend has now stabilised. We have revised our earnings upwards by 2.8% for FY15F and 7.4% for FY16F, to reflect a total rate hike of 50bps.

- The share price had re-rated recently from the year low of c.RM4.20 in 1Q. We believe that the share price had rerated strongly due to its asset-liability profile which is best positioned in a rising rate environment.

- The company does not expect any major impact on asset quality as it believes its customer base to be able to absorb the interest rate hikes. It has earlier articulated targeted credit costs of 15bps for FY15F. We expect interest to sustain on the stock given the rising rate environment as well as its strong asset quality. Maintain HOLD.

Source: AmeSecurities