Period

3Q16/9M16

Actual vs. Expectations

Alliance Financial Group (AFG)’s 9M16 CNP of RM390.4m (-6.9% YoY) is within our/market expectations, making up 71%/74% of respective full-year forecasts.

The decline was brought about by higher impairment allowances and lower Non-Interest Income (NOII).

Dividends

No dividend was declared, as expected.

Key Results Highlights

9M16 vs. 9M15, YOY

9M16 CNP declined by 6.9% due to total income down by a meagre 0.5% and dragged further by higher allowances for impairment at 138.5% to RM40.4m.

Total income was down dragged by non-interest income, which fell by 8.6% dragged by a drop in fee & commission income by 9.8%.

NIMs fell by 6bps to 2.01% mainly due to higher cost of funds arising from issuance of new Tier- 2 subordinated MTS. Excluding this impact, NIMs fell by 1bps.

Cost to Income Ratio (CIR) rose by 2.8ppts to 47.4% as opex growth of 5.8% outpaced total income growth (-0.5%). Higher opex due to higher administrative costs (+18.6%) and personnel costs (+6.2%). The recorded CIR was higher than the industry CIR of 45.5%.

Loans grew at 8.5% whilst deposits expanded 5.0%, which are better than the industry loan/deposit growth of 7.9%/1.8%. (We had expected growth of 8.3%/9.0%). LDR rose 2.8ppts to 88.8% (above the industry average of 86.5%) as loans outpaced growth. Loans were driven by the SME segment which grew 17.2% whilst deposit growth was driven by the individual segment. Deposits growth was driven by Business enterprises growth of 10.9%.

CASA ratio improved by 23bps to 35.0% driven by strong growth in demand deposits at +6.3% (despite intense competition for deposits).

Assets improved as Gross Impaired Loans (GIL) fell by 6bps to 1.08% as loans growth outpaced NPL, which grew by 3.1%. The industry impaired loans was at 1.6%.

Loan loss coverage was down by 115bps to 93.0% attributed to lower provisioning of 1.9% vs NPL growth of 3.1%. Credit charge ratio was at 22bps (in line with our expectations).

CET1 and CAR improved by 20bps and 413bps to 11.3% and 17.1% (after deducting proposed dividends) well above the regulatory requirements of 7% and 10.5%), respectively.

ROE was at 11.3% (in line with our forecast of 11.5%).

3Q16 vs. 2Q16, QoQ

CNP continues to slow down, rising by a meagre 0.7% (2Q16: +10.4%) dragged by declining NOII at 10.5% (2Q15:+17.6%).

Not much compression on NIMs as it fell by 4bps to 2.15%.

After dropping by 3.2ppts in the 2Q, CIR rose by 3.0 ppts in the current quarter.

Loans grew by only 10bps to 1.8% (2Q15: 60bps) while deposit growth declined by 1.2% (2Q16: +0.3%). This led to LDR surging by 2.6% to 88.8%. CASA improved by 140 bps to 35.0% (2Q16 it fell by 90bps).

Asset quality improved by 4bps as GIL fell to 1.08%. LLC improved by 31bps to 93.0% after falling by 12.7ppts in 2Q16. Lower allowances led to credit cost improving 4bps 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. Imputed 8.7% and 8.6% growth for the next two financial years.

Customer deposit growth: Revised to 5.6% and 5.7% for FY16/FY17 respectively. (Previously at 9.5% and 9.2% for FY16E and FY17E.)

NIM: Unchanged for both FY16E/FY17E at 2.2%.

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

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

Change to Forecasts

As the results of our slight tweaking our forecasts, FY16/17E earnings are revised downwards by 2.5%/7.5% to RM535m/RM548m.

Rating

Maintain MARKET PERFORM

Valuation

We reduce our target price (TP) to RM3.88 (from RM4.18) as we rollover our valuation to FY17. This is based on a blended FY17E price-book (PB)/price-earnings (PE) ratio of 1.3x/9.9x (previously PB/PE of 1.4x/10.9x).

The lower targeted price multiples are to reflect the possibility of tighter NIMs and higher credit costs going forward.

Note that the applied PB and PE ratios are based on their historical 5-year historical range with -1.0 Standard Deviation below their respective 5-year mean.

Risks

Further margin squeeze.

Slower progress in building up NOII.

Higher loan loss provisioning.

Source: Kenanga Research - 23 Feb 2016