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

- AFG’s 1QFY15’s annualised net earnings was seemingly short of consensus estimates’ RM595.9mil by 12.2% and ours by 12.5%. However, there was a MSS cost of RM10.6mil incurred in this quarter.

- Stripping off this one-off item, annualised net earnings were 6.8% below consensus forecast and 7.2% below our estimates. The main difference for us is the net interest income line, as we have modelled in total interest rate hikes of 50bps in the subsequent quarters. Thus, the 1Q has not yet fully reflected any positive impact from rate hikes.

- The company registered strong annualised loans growth of 12.4%, in line with company’s targeted growth of 10%- 11% for FY15F. We believe strong loans growth was due to a faster turnaround time, following AFG’s credit process re-engineering initiative to streamline processes.

- In terms of loans by purpose, loans growth was again mainly driven by the consumer segments, with the residential mortgage segment recording annualised growth of 15.2% and non-residential mortgage loans segment registering annualised loans growth of 26.9%.

- Growth for loans to the SME segment (19.0% of total loans) were robust at 7.0% QoQ in 1QFY15, and 19.9% YoY (to RM6.3bil), driven mainly by purchase of non-residential properties.

- There was a marginal rise in absolute gross impaired loans balance at 2.2% QoQ in 1QFY15 (4QFY14: -5.6% QoQ), but gross impaired loans was stable and unchanged at 1.4% (4QFY14: 1.4%). Thus, we consider the uptick to be in line with its loans growth. Loan loss cover was stable at 90.2% in 1QFY15 when compared to 92.7% in 4QFY14.

- The 1Q results affirm AFG’s good growth momentum in both the consumer and SME segments. We expect interest to sustain on the stock given the rising rate environment as well as its strong asset quality. Maintain HOLD.

Source: AmeSecurities