KUALA LUMPUR: Alliance Financial Group’s (AFG) net profit for the first half ended Sept 30, 2016 (1HFY17) was at 49% of CIMB Equities Research and consensus full-year forecasts.

It said on Wednesday AFG’s 1HFY17 net profit rose 3.3% on-year on the back of 1.9% on-year increase in operating revenue.

“We expect loan growth to recover in the coming quarters, we continue to rate Alliance a Hold given the upturn in credit cost cycle. Upside risks for our call are stronger-than-expected recovery in loan and fee income growth while downside risk is a spike in credit costs. We prefer BIMB for exposure to smaller-capped Malaysian banks,” it said.

AFG’s 2QFY17 net profit fell 1.5% on-year in 2QFY17, impacted by the 1.7% on-year slide in operating revenue.

CIMB Research said the lower topline was caused by (1) rate cut, which shaved 10 basis points from its 2QFY17 loan yield and led to a 4.2% on-year drop in net interest income; and (2) a 16% on-year decline in non-interest income, primarily due to foreign exchange loss of RM11.9mil (US$3mil) compared with a gain of RM5.6mil (US$1.3mil) a year ago.

“Loan growth remained weak at only 3% on-year in September 2016, on par with the level in June 2016 but below the industry’s 4.2%. This was mainly due to the tepid expansion of 1.2% on-year in September 2016 for its residential mortgages, which accounted for 40% of its loan book.

“However, the bright spot was the 11.2% on-year rise in working capital loans in September 2016. Management is guiding for stronger loan growth in the coming quarters, targeting loan growth of mid-to-high single-digit rates for FY17,” it said.

CIMB Research was quick to point out that not only did AFG's asset quality not deteriorate under the weight of the macro headwinds, its gross impaired loan ratio had in fact improved significantly from 1.17% in June 2016 to 0.94% in September 2016. Meanwhile, loan loss coverage rose from 83.9% to 101.9% over the same period.

“We cut our EPS forecasts by 2.9% for FY18 and 3.3% for FY19 as we lower our projected FY18-19 loan growth from 8.5% to 5%. This pushes down our DDM-based target price (TP) from RM4.00 to RM3.90 despite a roll-over of our valuation to end-2017,” it said.