The positives in AFG’s 3QFY14 results were: i)  above-industry loan and deposit growth; ii) mild sequential NIM expansion; iii) tight cost control,as  earlier  cost  restructuring  initiatives  start  to  be  felt;  and  iv)  further improvement  in  asset  quality.  However,  credit  cost,  while  still  low,appears  to  be  trending  towards  normalised  levels,  thus  dampening bottomline growth. We maintain our MYR5.15 FV and NEUTRAL call.

• 3QFY14 results in line.  AFG’s 3QFY14 net profit of MYR137m (+3% yo-y; +4% q-o-q) met our estimate but was at the lower end of consensus’ forecast. 9MFY14 net profit amounted to MYR406m (+2% y-o-y), making up 74% of our and 71.5% of consensus full-year estimates.
• Results highlights.  The positives are: i)  above-industry  growth in loans and deposits, ii) net interest margin (NIM) rose 3bps q-o-q but sequential NIM trend may be volatile. That said,  the  15bps  y-o-y  NIM decline  was significantly lower than the 22-35bps drop  in 1QFY14 and 2QFY14, iii) overheads were tightly  controlled (-6% y-o-y;  flat  q-o-q).  Thus,  its  costincome ratio (CIR)  dipped  to  43.7% (2QFY14: 45.9%;  3QFY13:  47.6%), and  iv)  a  significant  improvement  in  asset  quality  with  absolute  gross impaired  loans  down  10%  q-o-q  (-18%  y-o-y)  due  to  a  lower  impaired loan  formation  rate  (50bps  vs  2QFY14:  62bps)  and  higher  write-offs. However, 3QFY14 credit cost was 5bps vs  2QFY14:  -7bps (3QFY13:  -19bps) due to higher individual and collective allowances.
• Loan and deposit growth.  3QFY14  gross loans  expanded 12.8% y-o-y (+2.3%  q-o-q),  boosted  by  the  consumer  and  SME  segments.  Growth would  have  been  even  stronger  if  not  for  the  repayment  of  a  chunky corporate loan. Total customer deposits grew 17% y-o-y (flat q-o-q) while current account and  savings account (CASA)  deposits  rose 7.5% y-o-y (+5%  q-o-q).  Thus,  the  loan-to-deposit  (LDR)  ratio  rose  to  82.5%  from 80.5% at end-2QFY14, while the CASA ratio rose 180bps q-o-q to 35%.
• Capital.  AFG remains well-capitalised,  with a  group common equity tier 1 (CET-1) ratio of 10.4% as at end-December.
• Dividends.  AFG declared a second interim net DPS of  11.5  sen  in Dec 2013  (3QFY13:  10  sen net), which brought  its  9MFY14  net DPS to  19 sen (FY13: 16.6 sen net). We do not expect further dividends for FY14.
• Forecasts and investment case. We tweak our FY14 net profit forecast but  the  impact  is  insignificant.  We  maintain  our  MYR5.15  FV  (10% premium to target P/E of 11x) and NEUTRAL call.

Briefing highlights

Management  retained  the  13%  loan  growth  target  for  FY14.  For  FY15,  it  thinks growth  of  around  13-14%  is  achievable,  supported  by  robust  consumer  and  small and medium enterprise (SME)  loan pipelines. AFG’s SME customers have started to see projects under the various economic programmes flow down the value chain but are  also  mindful  of  cost-push  inflationary  pressures  (eg  hike  in  electricity  tariffs). Meanwhile,  the  consumer  segment’s  housing  loan  applications  towards  end-2013 were  strong,  and  this  could  help  support  loan  drawdowns  ahead.  Overall, management  said  that  the  strong  loan  growth  momentum  in  both  the  SME  and consumer  segments  sustained  in  January,  with  SME  lending  backed  by  strong demand  for  trade  financing  while  consumer  lending  was  propped  up  by  housing loans.  AFG  also  said  that  its  trade  loans  were  mainly  for  imports,  as  its  SME customers are more reliant on domestic demand.

Management thinks the lower and middle-lower income brackets are the segments most vulnerable to rising inflationary pressures, but at this stage, it has not noted any asset quality issues.  The improvement in asset quality noted in the 3Q results was also helped by some large recoveries.No  guidance  was  provided  for  NIM,  but  generally,  management  said  this  remains under pressure due to: i)  a combination of competitive pressures on both loans and deposits,  ii)  roll-off  of  higher  yielding  co-op  loans,  and  iii)  impact  from  the  strong growth  in  new,  lower  yielding  mortgages.  It  had  noted  sporadic  competition  for deposits during the quarter, but the good news is that this was confined to certain banks and was not sustained.  In the meantime, commercial and SME NIMs stayed stable  while  corporate  NIMs  have  improved  as  rates  for  certain  accounts  were repriced up.

The  average  duration  for  available-for-sale  (AFS)  securities  is  about  4.5-5  years, which the management is  comfortable with,  given that the yield curve has steepened quite significantly since mid-2013.

Collective allowance (CA) to total loans (net of individual allowance) stood at 1.07% as at end-Dec 2013. To meet Bank Negara (BNM)’s requirement of a minimum 1.2% CA  plus  regulatory  reserve,  management  said  about  MYR40m  would  need  to  be transferred to regulatory reserves  from retained earnings. This is not too significant,as it would impact the CET-1 ratio by just 14bps.

Risks
The  risks  include:  i)  slower-than-expected  loan  growth;  ii)  weaker-than-expected NIMs; iii) deterioration in asset quality; and iv) changes in market conditions that may adversely affect investment portfolio.

Forecasts
We lower our FY14F non-interest income projection by 7% to reflect the challenging treasury  market  conditions,  but  this  is  compensated  by  our  revised  credit  cost estimate of 9bps (21bps previously) due to the low credit charge-offs enjoyed thus far. Overall, our FY14F net profit forecast is relatively unchanged.

Valuation and recommendation
Maintain NEUTRAL  and MYR5.15 FV (a 10% premium to target P/E of 11x to reflect the potential entry of DBS (DBS SP, BUY, FV: SGD19.40). We like AFG’s robust loan pipeline, sound asset quality and tight control over cost. However, NIM pressures and challenging  treasury  markets  are  dampeners  to  income  growth,  in  our  view.  The normalising  of  credit  cost  ahead  would  also  constrain  bottomline  growth,  as  seen from the group’s 3Q and 9M results. 

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