We retain our NEUTRAL call with a lower TP of MYR4.40 (5% downside). AFG’s 4QFY15 (Mar) results were below expectations, hampered by NIM compression (combination of accounting adjustment and funding cost pressures) and soft non-interest income. These, however, were balanced by above-industry loan and deposit growth, as well as improved asset quality and loan loss coverage levels.

4QFY15 missed estimates. Alliance Financial Group’s (AFG) 4QFY15 net profit of MYR93m (-41% YoY, -26% QoQ) was below expectations, with FY15 earnings of MYR531m (-6% YoY) 8-9% below our and consensus estimates. Even after stripping out the one-off accounting adjustment of MYR18m made in 4Q with respect to income recognition on balance transfer for credit cards, the results would still have been 6- 7% below expectations, due to lower-than-expected non-interest income.

Results highlights. The sequential drop in net profit was due to a combination of: i) net interest margin (NIM) pressure. NIM compressed by an estimated 27bps QoQ (-29bps YoY) with about half of the contraction due to the above accounting adjustment, by our calculations; ii) a 21% QoQ decline in non-interest income due to forex loss of MYR2m (3QFY15: forex gain of MYR8m); and iii) a 6% QoQ rise in overheads. Its loan impairment charge was lower at MYR17m vs MYR27m in 3QFY15, as asset quality improved further.

Loan and deposit growth. Gross loans expanded 15% YoY (4% QoQ), ahead of the 10-11% target. Loan growth was driven by consumer (+13% YoY) and SME (+27% YoY) banking. Customer deposits rose 8% QoQ/14% YoY as part of efforts to keep the balance sheet liquid while current and savings account (CASA) deposits rose 13% YoY (4% QoQ). Thus, AFG’s loan-to-deposit ratio (LDR) fell 310bps QoQ to 82% while the CASA ratio eased by 110bps QoQ to 33.7%.

Asset quality remained intact with absolute gross impaired loans down 6% QoQ (-14% YoY). The group’s loan loss coverage also improved to 102.7% from 94.2% as at end-3QFY15.

Dividends. A second interim DPS of 6.4 sen was declared, bringing FY15 DPS to 15.4 sen (FY14: 29.5 sen). This was below our expected DPS of 20.5 sen due to the weaker-than-expected results and lowerthan- expected dividend payout ratio of 45% (vs our 55% assumption).

Forecasts and investment case. We cut our FY16F-17F earnings by 7- 11% following the weaker-than-expected results, resulting in a revised TP of MYR4.40 (from MYR4.90). Maintain NEUTRAL.

Source: RHB Research - 28 May 2015