Period

2Q16/1H16

Actual vs. Expectations

Alliance Financial Group (AFG)’s 6M15 CNP of RM254.9m (-14.9% YoY) is within our/market expectations, making up 49%/48% of full-year forecasts. The decline was brought about by higher impairment allowances and lower Non-Interest Income (NOII).

Dividends

As expected an interim dividend of 8.0 sen/share was declared.

Key Results Highlights

1H16 vs. 1H15, YOY

1H16 CNP down by 14.9% brought about by higher loan loss provisions of RM35.7m and declining total income at 2.3%.

Decline in total income attributed to fall in NOII by 14.0% was mitigated by higher Islamic banking income growth of 10.2%. Fall in NOII attributed to fall in net fee income and net brokerage fees at -20.5% and -17.2%, respectively.

Net Interest Margin (NIMs) fell by 10bpts to 2.0% as net interest spread fell by 6bps.

Opex rose by 2.7% leading to Cost Income Ratio (CIR) rising by another 2.2ppts to 46.9%.

Loans grew at 10.2% whilst deposits grew at 8.1%. (vs our estimates of 8.7% and 9.5% respectively)

Loans were driven by loans to construction (+24.7%), purchase of non-residential property (+17.1%) and purchase of fixed assets (+11.6%). Domestic growth was driven by deposits from financial institutions and government & statutory bodies at 29.8% and 22.5%.

Loan to deposit ratio increased by 1.7ppts to 86.3% (above the industry ratio of 85.4%) with CASA’s ratio falling by 1.6ppts to 33.6%.

Assets improved as GIL fell by 8bps to 1.12% as loans growth outpaced NPL, which grew +3.4%.

Loan loss coverage was up by +4.1ppts to 92.7% attributed to higher provisioning by +8.1% vs NPL growth of 3.4%. Credit charge ratio was at 0.19% (we had assumed it to be at 0.22%).

CET1 and CAR improved 160bps and 40bps to 11.7% and 13.6%, (after deducting proposed dividends) and still above the regulatory requirements of 7% and 10.5%, respectively.

ROE was at 11.2% (in line with our forecast of 11.5%). 2Q16 vs. 1Q16, QoQ

CNP rose 12.0% (+30.7%) due to higher total income of 6.3% despite higher loan loss provisions of RM19.3m (+17.2%) and higher tax rate of 25.4% (1Q16: 19.9%).

NII and NOII growth was slower than the previous quarter. NII and NOII grew at 2.6% and 17.6% respectively (1Q16: +11.6% and +26.4%, respectively). NOII growth was underpinned by net fee income and forex translation.

NIMs improved by 10bpts to 2.1%.

CIR fell by 3.2ppts to 45.4% as opex declined by 0.8% (1Q16: +1.1%).

Key Results Highlights

(Cont’) 2Q16 vs. 1Q16, QoQ

Loans grew higher in 2Q at +1.7% (1Q16: +1.1%) and deposits improved at +0.3% (-1.6%). LDR continues to surge higher by 1.20ppts to 86.3%.

Asset quality deteriorated with GIL ratio up by another 11bpts to 1.12% as LLC fell by 12.73ppts to 92.7% as NPL surged 12.5% vs. loan loss provisions, which lessened by 0.2%. Higher loan loss provisions led credit charge ratio increasing by 1bps to 0.19%.

Outlook

Due to the slowing economy which will impact client activities and revenues, we maintained our pragmatic view where the slowing economy may trigger higher NPLs but loan loss provisions are still mild. Hence, going forward, management might have to make higher loan loss provisions while the competition for deposits might intensify further as the group strives to enhance its pool of liquidity.

As such, we maintained our conservative assumptions:-

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.

NIM: Unchanged for both FY16E/FY17E at 2.2 and 2.3%, respectively.

CIR: Unchanged at 48.2%/ 49.9% for FY16/FY17.

Credit charge ratio: Unchanged at 22 bps for FY16E/FY17E. This is in line with management’s guidance of 20-25bps.

Change to Forecasts

As the results were within our expectations, we made no change to our earnings forecasts.

Rating

Maintain MARKET PERFORM

Valuation

We reduce our target price (TP) to RM4.18 (from RM4.40) based on a blended FY16E price-book (PB) / priceearnings (PE) ratio of 1.42x /10.9x (previously PB/PE of 1.5x/12.0x). This is to reflect the possibility of severe NIMs and credit costs going forward.

The PB and PE ratio is based on their historical 5-year average with -0.5 Standard Deviation.

Risks

Further margin squeeze.

Slower progress in building up NOII.

Higher loan loss provisioning.

Source: Kenanga Research - 30 Nov 2015