Analysts upbeat on Alliance Financial prospects

KUALA LUMPUR: Alliance Financial Group Bhd (AFG)'s 17 per cent rise in net profit was in line with analysts' expectations and most maintained their positive calls on the country's smallest banking group's stock.

"Excluding RM12 million one-off gains from sale of investments, the first quarter result was in line," Lim Sue Lin of HwangDBS Vickers Research said in a note to clients yesterday.

She kept a "buy" rating and target price of RM4.40 on the stock.

This suggests a 27.5 per cent upside from AFG's last traded price of RM3.45, which was 3 sen higher than the previous day.

Its first quarter net profit came in at RM129.6 million compared with RM110.7 million in the same period a year ago.

The strong numbers were boosted by the RM12 million one-off gain and a net writeback of RM7.9 million in loan impairment allowances.

Of interest, the banking group's non-interest income jumped by 50.8 per cent compared with the preceeding quarter, helped by higher fee income (up 25 per cent) and higher gains from investments.

In contrast, net interest income rose by just 5.6 per cent.

The stronger fee income suggests that the group's focus on transactional banking is bearing fruit.

RHB Research Institute raised its three-year earnings forecasts for the group by between 3.4 per cent and 5.3 per cent on the back of higher non-interest income projections. It raised its target for the stock by 20 sen to RM3.60, but maintained its "market perform" rating.

Kenanga Investment Bank raised the stock to an "outperform" with a target of RM3.90, while CIMB Equities Research kept its "underperform" call and RM3.20 target.

HwangDBS decided not to raise its earnings forecasts for AFG despite the strong result because it believes the investment gains and loan recoveries in the first quarter will not be sustainable.

"However, the stronger fee income and SME (small-to-medium enterprise) loan book supports our view that these will boost AFG's sustainable earnings and return-on-equity," Lim said.

AFG's loans grew by 5 per cent that quarter from a year ago, which is well below the industry average of 13.5 per cent.

The group's intention to diversify its loans mix, with more focus on the SME and corporate segment, is expected to gain traction only in its third or fourth quarter, Hong Leong Investment Bank Research noted.

It pointed out that this should follow from the bank notching up record loan approvals, mainly in mortgage and wholesale, during the April-to-July period.

The research house kept its "buy" call and RM3.70 target on the stock.