- We maintain our BUY rating on Alliance Financial Group Bhd (AFG) with an unchanged fair value of RM4.30/share. This is based on unchanged ROE of 11.8%for FY16F, thus leading to unchanged fair P/BV of 1.4x.

- AFG’s set of 2QFY16 net earnings, if annualised, was within our forecasts (-2.7%) and the consensus net earnings forecast of (-1.3%). The 1H net earnings made up 47.4% and 48.1% of our and consensus full-year net earnings, respectively, for FY16F.

- Its targeted loans areas of SME & commercial, and unsecured consumer loans, registered healthy annualised loans growth of 10.6% in this quarter. NIM rose at a faster rate of 3bps QoQ in 2QFY15 (2QFY15: 1bps), mainly on the back of initiatives to focus on profitable segments, as well as opportunistic repricing efforts. This led to a commendable 5bps improvement in its gross interest margin to 4.72% in 3QFY15 from 4.67% in 1QFY15.

- Gross impaired loans balance registered a RM50.6mil QoQ rise, or a 13.5% QoQ increase in this quarter, in contrast to the -1.2% QoQ improvement seen in 2QFY16.

- The company clarified that the bulk of the RM50.6mil QoQ increase came mainly from the reclassification of newly rescheduled and restructured (R&R) loans into impaired loan status. These new R & R loans amounted to RM43mil in 3QFY15.The company indicated that these were well collaterised. Thus, the loan loss provisioning amount related to these R&R loans totalled only RM5mil in 3QFY15.

- The company expects more R & R loans to surface over the next few months, and expects a gradual increase in gross impaired loans. However, based on recent in-house assessment, it does not expect any major spike in gross impaired loans going forward.

- AFG expects its credit costs to be on track to reach its target of 20bps to 25bps for FY16F, despite the slowdown in the macro environment. It does not expect credit costs to spike upwards to the 30bps to 40bps range, based on its latest review. We are maintaining our conservative assumption of 40bps credit costs for FY16F.

- All in, the 2Q results provided good evidence of strong execution of the company’s targeted profitable growth areas. In addition, we are assured by transparent clarifications on its loan loss provisioning policy as well as the indication on the likely direction of its gross impaired loans. Maintain BUY.

Source: AmeSecurities Research - 30 Nov 2015