Period

1Q16

Actual vs. Expectations

The reported 1Q16 net profit of RM121.9m (- 6.8% YoY) was below expectations, accounting for 21.5% of consensus estimate of RM565.9m and 20.8% of our forecast of RM585.0m.

1Q16 net profit was lower by 6.8% YoY at RM121.9m.

This is below expectations, accounting for 20.8% and 21.5% of our full-year forecast and street numbers, respectively.

Dividends

As anticipated, no dividend was declared. Historically, dividends were declared in either the second quarter or final quarter of each financial year.

Key Results Highlights

1Q16 vs. 1Q15, YOY

Alliance Financial Group’s (AFG) 1Q16 pre-tax profit and net profit declined by 7.3% (1Q15:- 5.8%) and 6.8% (1Q15: -5.1% YoY), respectively, despite total income growing modestly by 2.3% to RM344.3m. The drag was caused by lower non-interest income (NOII) declining by 6.3% YoY and higher allowances for impairment of RM16.4m. NOII was lower due to lower contribution from investment income.

Net interest income (NII) slower at 4.0% YoY (1H15: 8.3% YoY due to lower loan growth of 12.0% YoY (1H15: 15.2% YoY) coupled with a retracement of net interest margin (NIM) by 6.0bps.

Cost-to-income ratio (CIR) maintained at 48.6% with a moderate growth of opex at 3.5% (1Q15:- 7.5%) on the back of higher opex growth outpacing total income growth (vs. our assumption of a CIR of 46.2%).

The quarter saw loan loss impairments of RM16.4m (1Q15: RM1.8m). The annualised credit charge ratio was recorded at 18bps, much higher than our expectation of 10bps.

Annualised gross loan growth of 12.5% YoY was, however, higher than our estimate of 8.6% growth YoY. The higher growth was mainly driven by stronger loan growth from the SME segment, which grew by 21.4% YoY. This segment accounted for 21% of gross loans (1Q15: 18%). In terms of loan by economic purpose, AFG seems focused on purchase of landed property, which constituted 41.3% of gross loans. This segment grew by 11.3% YoY (1Q15: +14.9% YoY).

Customer deposits grew 10.8% YoY, against our assumptions of 9.5% YoY (Industry: +7.3% YoY). The low cost deposits CASA grew stronger at 10.1% YoY. This led to higher CASA ratio of 34.5%, which mainly driven by SME segment (just double check this fact is right).

Loan-to-deposit ratio (LDR) has improved to 85.1% from 83.9% as at end of June 2014. The LDR remains supportive for growth.

Asset quality for the Group improved slightly. Gross impaired loans ratio improved to 1.02% from 1.36% a year ago. Loan loss coverage (LLC) is at 104.2% (vs. industry average of 97.5%), higher than a year ago at 90.2% due to declining growth of gross impaired loans at of -15.9% YoY (1Q15: -19.2% YoY).

The annualised ROE of 10.8% is way below our estimate of 12.2%.

1Q16 vs. 4Q15, QoQ

QoQ, net profit improved by 30.7% driven by NOII which grew by 26.4% pushed by growth in brokerage and wealth management. The NOII ratio to total income was higher by 2.5ppts to 22.7% from the previous quarter.

Total income improved by 12.5%. NII grew by 11.6% in-line with the 16bps improvement in NIM while gross loans grew 1.1% .

Operating expenses inched slightly to 1.1% as CIR diminished to 48.6% as opposed to 54.1% in 4Q15 as total income growth outpaced opex growth at 12.5%.

Outlook

Due to the slowing economy which will impact client activities and revenues, we have turned more pragmatic. As such, we make some changes in our assumptions in our earnings:-

Total loan growth: Unchanged. We imputed 8.7% and 8.6% growth for the next two financial years.

Customer deposit growth: Unchanged at 9.5% and 9.2% for FY16E and FY17E, respectively, due to the strong deposit growth in the 1Q.

NIM: Unchanged for both FY16 and FY17at 1.7% .

CIR: We tweaked it slightly to 48.7% from 46.2% previously for FY16.

Credit charge ratio: 22 bps for FY16E and FY17E (from 10bps previously). This is in line with management’s guidance of 20-22bps.

Change to Forecasts

All in, we lowered our FY16E and FY17E net profit estimates by -11.01 and -13.1% respectively to RM520.4m (-2.0% YoY) and RM519.7m (-0.1% YoY) from RM585.0m and RM601.1m, for now.

Rating

Maintain MARKET PERFORM

Valuation

Consequent to our lower earnings expectation, we reduce our target price (TP) to RM4.40 (from RM4.70) based on a blended FY16 price-book (PB) / price-earnings (PE) ratio of 1.5x / 12.0x reflecting our assumptions of lower ROE of 10.9% (from 12.2%) and higher credit cost of 22bps (from 10bps).

The PB price ratio is based on historical PB multiple of 1.5x-1.6x when ROE hovered about 10%-13%. The PE ratio is 1SD below the Group’s historical PE multiple.

Risks

Further margin squeeze

Slower progress in building up NOII

Higher loan loss provisioning

Source: Kenanga Research - 19 Aug 2015