Alliance Financial Group (AFG) announced that its wholly-owned banking group Alliance Bank Malaysia has established a debt issuance programme (which was lodged with the SC) of which comprises: i) a 30-year RM1.5bn nominal value Senior MTN programme; ii) a 30-year RM2.0bn Subordinated MTN programme; and iii) a 7-year RM500m Commercial Paper programme. The objective of the debt facilities are primarily for general banking and working capital requirements while the sub-debt shall also be utilised for any redemption of existing subordinated notes under Alliance Bank. (Source: Bursa)

Comments: We believe that the debt issuance programme may not be drawndown entirely at once but is meant for upcoming funding needs of the business operations. This will however increase the weighted average funding costs of AFG and hence, may cause further NIM erosion (from 2.16% as at Jun15).

Nonetheless, over the longer term, the debt facility will enable the bank to lock-in funding cost. While the size of the funding is large, we do not think that it is meant for acquisitions as the funding qualifies only as Tier 2 capital under Basel 3.

We maintain our BUY rating on AFG, with an unchanged Price Target of RM4.50 (based on a 1.36x CY16E P/BV multiple on ROE of 11%). Near-term catalysts include AFG’s differentiating strategies in asset-liability management, track record as a banking solutions provider to the SMEs/ high-net-worth customers and while reaping results of rationalization initiatives.

Source: Affin Hwang Capital Research - 22 Sep 2015