AFG’s  2QFY14  results  were  muted,  as  challenging  market  conditions due to rising bond yields led to weaker investment income. That said, there were some positives, such as: i) NIM holding steady q-o-q, ii) loan growth  picking  up  pace,  iii)  lower  overheads  as  earlier  cost restructuring  initiatives  start  to  be  felt,  and  iv)  asset  quality  staying intact. We maintain our MYR5.15 FV and NEUTRAL call.

• 2QFY14 results slightly soft. AFG reported a muted set of results, with 1HFY14’s MYR269m net profit (+1% y-o-y) 2%/6% below our/consensus FY14  estimates  when  annualised.  Its  pre-impairment  operating  profit (annualised) was 10% below our forecast,  mainly on  net interest margin (NIM)  pressure  (1HFY14:  -29bps  y-o-y)  and  challenging  market conditions, leading to lower investment income. These  were cushioned by  loan  impairment  allowance  of  just  MYR1m  in  1HFY14  vs  our MYR63m  full-year  forecast.  Pending  today’s  analyst  briefing,  we  leave our forecasts unchanged.
• Result highlights.  2QFY14 net interest income  rose 3% q-o-q,  as loan growth  picked  up  pace  (+4%  q-o-q;  +12.6%  y-o-y)  while  NIM  held steady.  The  sequential  loan  growth  pickup  was  driven  by  loans  for securities purchases, residential and non-residential mortgages, and hire purchase.  Net  interest  income  y-o-y  was  down  3%,  mainly  on  NIM pressure  (-35bps  y-o-y)  from  lower  asset  yields.  Non-interest  income softened  27%  q-o-q  (ex-lumpy  MYR30m  bancassurance  fees  in 1QFY14)  and  19%  y-o-y  on  lower  investment  income  from  tougher market  conditions.  With  quantitative  easing  (QE)  tapering  looming, market conditions may continue to stay challenging.  Mitigating the weak non-interest  income  were  lower  overheads  (-4%  q-o-q  ex-restructuring costs; -6% y-o-y) and a  MYR5m writeback  in loan impairment allowance (1QFY14:  MYR5m  charge;  2QFY13:  MYR7m  writeback).  Asset  quality was intact with absolute gross impaired loans down 7% q-o-q (-13% y-oy),  while  the  gross  impaired  loan  ratio  improved  by  20bps  q-o-q  to 1.74%.  Total  deposit  growth  kept  pace  with  loan  growth  at  3%  q-o-q (+14% y-o-y), led by fixed deposits and NIDs. However, current account, saving account (CASA) deposits fell 4% q-o-q (+11% y-o-y).
• Investment case.  Maintain MYR5.15 FV (10% premium to target P/E of 11x  to  reflect  potential  entry  of  DBS  (DBS  SP,  BUY,  FV:  MYR19.40)) and  NEUTRAL  call.  Results are unlikely to excite, but loan growth has picked up pace, NIM has stabilised while asset quality is still intact.

Company Profile
AFG is an integrated financial services group. Its main subsidiaries are Alliance Bank Malaysia, Alliance Investment Bank and Alliance Islamic Bank while its operations are mainly domestic.

Source: RHB