- We maintain HOLD 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.

 - We expect AFG to record ongoing good loans growth, similar to its latest reported September 2015 quarter’s loans growth of 14%, on the back of faster turnaround time arising from AFG’s credit process re-engineering initiative since early last year. We expect AFG’s strategic focus to still be on the micro SME and consumer segments.

 - AFG does not have any major exposure in the oil and gas sector. The company’s total exposure to the plantation sector is estimated to be no more than 2% to 3% of total loans.

 - The company has done well in terms of recoveries in the past one year. Looking ahead, it believes its normalised credit costs are likely to range between 20bps and 25bps, without recoveries.

 - NIM also did well in its latest reported September 2015 quarter (+8bps QoQ). However, we believe AFG is likely to have experienced intensified fixed deposit costs as well, given the recent escalation in fixed deposit campaign rates.

 - We understand this is partly due to the implementation of liquidity coverage ratio (LCR), which has caused the fixed deposit rates for selected campaigns to start rising since end-2014. The company is maintaining its guidance of 10bps YoY compression for NIM in FY15F.

 - AFG had earlier stated a dividend payout ratio of up to 60%. While the company has a comfortably high group CET1 ratio of 10.1%, we have projected a lower dividend payout ratio of 46% for FY15F, and 45% for FY16F.

 - This is due to further indications from regional countries of the counter-cyclical buffer ranging between 2% and 2.5%.

 - We expect AFG to maintain its strategic focus in the SME and consumer segments. Maintain HOLD.

Source: AmeSecurities