AmWatch - Alliance Financial : Positive surprise from NIM improvement BUY, 19 Aug 2015

STOCK FOCUS OF THE DAY

Alliance Financial Group : Positive surprise from NIM improvement         BUY

We upgrade Alliance Financial Group Bhd (AFG) to BUY from HOLD, with a lower fair value of RM4.30/share (from RM5.00/share previously). This is based on a revised ROE of 11.8% (from 12.8%) for FY16F, leading to a lower fair P/BV of 1.4x (previously 1.6x).

AFG’s 1QFY16 net earnings, if annualised, trailed our forecast by 17.4%, and consensus estimates’ RM565.9mil by 13.8%. The shortfall compared to our forecast is due mainly to the non-interest income line. However, NIM surprisingly improved by 1bps QoQ to 2.16% in 1QFY16, from a normalised level of 2.15% in 4QFY15. This is in contrast to the expectations of ongoing QoQ compression in NIM, in line with that of the banking industry. This is also ahead of the company’s targeted NIM compression of about 10bps YoY for FY16F to mainly account for on-going deposit pressure. 

The NIM improvement was due mainly to concerted re-pricing effort for both its asset and liabilities portfolios. This indicates strong execution of its new strategy to boost profitability and asset efficiency as measured by risk-adjusted returns, in our view. AFG’s share price has softened, in line with other banking stocks, which we believe is reflective of concerns over the industry’s credit cost trends. Generally, the larger players in the industry have hinted at a higher normalised credit cost of 40bps next year, rising from a normalised level of 30bps this year. We have conservatively changed our credit cost assumption to 40bps (from 19bps previously) for AFG. AFG’s credit costs peaked at 62bps in FY09, during the external economic slowdown. We believe the company expects its credit costs to likely normalise at 30bps, assuming that industry credit costs normalise and rise to 40bps in FY16F. We believe our 40bps forecast is reasonable, assuming no major negative feedback loop impacts the bank’s earnings ahead. At the current share price level, we believe the risk-reward trade-off for AFG looks attractive, as AFG is currently trading at an attractive valuation of only 1.2x.

Others :

SapuraKencana Petroleum : At trough valuations              BUY

Padini Holdings : Earnings recovery on track         BUY

CB Industrial : Increased order book to drive growth       BUY

Magnum : Attractive dividend yield of 5.9%         HOLD

Star Publications : 1H: Thriving despite sluggish adex       HOLD

NEWS HIGHLIGHTS

AirAsia : AirAsia sees US$160mil savings from lower fuel price    

Automotive : MAA sees higher vehicle sales in August

DISCLAIMER:

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