PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Visit

12 May 2010
MARKET DATELINE

Alliance Financial Group Share Price

Fair Value
:
:
RM2.97
RM3.27
Poised For The Next Leg Of Growth Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (AFG; Code: 2488) Bloomberg: AFG MK

Net EPS Net Net
FYE PBT Profit EPS Gwth PER Book P/Book C.EPS* DPS Div Yld ROE
Mar (RMm) (RMm) (sen) (%) (x) (RM/s) (x) (sen) (sen) (%) (%)
2009 303.3 229.1 14.9 (41.3) 19.9 1.78 1.7 - 6.3 2.1 8.6
2010f 357.1 259.3 16.8 12.4 17.7 1.91 1.6 18.7 6.3 2.1 9.1
2011f 498.0 364.3 23.5 40.5 12.6 2.10 1.4 24.1 6.3 2.1 11.8
2012f 560.8 411.6 26.6 13.0 11.2 2.32 1.3 29.1 6.3 2.1 12.0
Main Market Listing / Non-Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES
E i
Issued Capital (m shares) 1,548.1
♦ New CEO could be announced in the coming weeks ... According to Market Cap (RMm) 4,597.9
press reports, the Board has identified a replacement for Datuk Bridget Daily Trading Vol (m shs) 2.5
Lai as group CEO and will announce the person’s name once BNM 52wk Price Range (RM) 2.11 – 3.18
approves the appointment. Major Shareholders: (%)
Temasek Hldgs 29.1
♦ … but in the meantime, it is business as usual for the group.
EPF 15.7
Notwithstanding the absence of a CEO, management reassured us that it
was business as usual for the group with consumer and commercial
banking remaining as the main areas of focus for the group. Management FYE Mar FY10 FY11 FY12
targets “above industry” loan growth, which we believe is achievable EPS chg (%) - - -
given the group’s niche in the SME and consumer segments. Var to Cons (%) (10.2) (2.4) (8.8)

♦ Relatively strong deposit franchise but still room to grow. The PE Band Chart
company has a strong low-cost deposit franchise with its CASA as a
percentage to total deposits being the highest in the industry. Despite its PER = 16x
PER = 14x
strong deposit franchise, we note that AFG’s unadjusted NIM is the third PER = 12x
lowest among peers. Nevertheless, we think this would mean that the
company has room to manoeuvre and can be competitive in terms of
pricing (which would indirectly translate into loan growth).

♦ 4Q net profit expected to be weaker qoq ... AFG is expected to

announce its 4QFY03/10 results next week. We expect a qoq drop in net
profit as 4Q LLP normalises (after the recovery of a corporat e loan in 3Q)
as well as another RM9.6m impairment provision on the Idaman CLO Relative Performance To FBM KLCI
(3QFY10: nil for Idaman CLO). This would bring the total provisions made
for Idaman to 100%. We do not expect any final dividend.
FBM KLCI
♦ … but expect strong earnings growth ahead ... Notwithstanding the
above, we believe the group is poised to post strong earnings growth in
FY03/11 on the back of: 1) organic growth from loan expansion; 2) stable
NIM (with potential upside, albeit temporary, from the hike in interest
AFG
rate); 3) higher non-interest income from improving economic and capital
markets conditions; and 4) absence of impairment provisions for its
exposure to CLOs as well as pre-emptive provisioning in FY03/09-10.

♦ Forecasts. No change to our forecasts for now.

♦ Investment case. We continue to like AFG given its niche in the

consumer and SME segments, strong deposit franchise, positive impact
from a rate hike, absence of CLOs provisions and aggressive pre-emptive
provisioning, all of which, we believe, means AFG is poised to record
strong earnings growth ahead. Fair value of RM3.27 is unchanged and is David Chong, CFA
based on 15x (1x discount to sector benchmark) CY10 EPS. Maintain (603) 9280 2186
Outperform call on the stock. david.chong@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 5

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 12 May 2010

New CEO Could Be Announced In The Coming Weeks But Operations As Usual

♦ New CEO could be announced in the coming weeks ... According to press reports, the Board has identified a
replacement for Datuk Bridget Lai as group CEO and will announce the person’s name once BNM approves the
appointment. This is consistent with our understanding from our discussion with management that the
appointment of a new CEO could be made in the next few weeks. As highlighted previously, we believe that the
leadership of the previous CEO and her team had set a strong foundation to execute its longer-term growth
strategy and this, we gather, has set the stage for the new CEO to take the group to the next level.

♦ … but in the meantime, it is business as usual for the group. Notwithstanding the absence of a CEO,
management reassured us that it was business as usual for the group and reiterated that the absence of a CEO
had not affected the operations and financials of the group. Consumer and commercial banking would continue to
be the main areas of focus for the group. For the consumer segment, the mortgage business continues to be a
priority for the group while the personal loans segment has also done rather well. Meanwhile, the SME segment
should benefit from the economic recovery but without the potential offsetting effect of refinancing via the bond
and/or equity markets. Management targets “above industry” loan growth, which we believe would be driven by
the consumer segment. Thus, given the group’s niche in the SME and consumer segments, we believe this is an
achievable target.

♦ Relatively strong deposit franchise but still room to grow. The company has a strong low-cost deposit
franchise. As at end-2009, its CASA as a percentage to total deposits stood at 41% and this was the highest in
the industry (26.7%) and ahead of second-placed Maybank’s 37.3%. Management sees this ratio staying well
above the industry thanks to the strong relationship it has built over the years with the SMEs. Despite its strong
deposit franchise, we note that AFG’s unadjusted NIM (excluding Islamic income) is the third lowest among peers.
Nevertheless, we think this would mean that the company has room to manoeuvre and can be competitive in
terms of pricing (which would indirectly translate into loan growth).

Regulatory Adoptions

♦ FRS139 should have minimal impact on the company while Basel II expected to be slightly positive
for ratios. AFG will be adopting FRS139 from FYE03/11. In preparation, we understand that the company has
already adopted the policy of making 100% provision (on the difference between principal amount and collateral
value), in compliant with the new accounting standard. Thus, according to management, its adoption come FY11
should have minimal impact on the company. Furthermore, the group has already made pre-emptive provisioning
on its performing loans (see below). Apart from FRS139, the group will also move towards the adoption of Basel
II IRB approach in FY03/11. This is expected to have a slight positive impact on its capital ratios.

♦ Basel III – robust capital ratios with no hybrid. Despite the potential of more stringent capital requirements
from Basel III, we believe AFG could easily comply given its robust capital ratios. As at Dec ‘09, Tier-1 and
RWCAR ratios were 11.3% and 15.5% respectively. Moreover, its Tier-1 capital is essentially made up of
shareholders funds (which BIS considered as high quality capital) with no Hybrid capital.

4QFY03/10 Results Preview

♦ 4Q net profit expected to be weaker qoq ... AFG is expected to announce its 4QFY03/10 results next week.
To recap, 9MFY10 net profit amounted to RM224.2m and accounted for 86% of our full-year net profit forecast of
RM259m. Our FY10F net profit estimate implies that AFG is expected to post weaker 4Q net profit as compared to
3QFY10’s net profit of RM99.9m, but this would still be a significant improvement as compared to 4QFY09’s net
profit of RM0.9m. We expect a qoq drop in net profit as 4Q LLP normalises (after the recovery of a corporate loan
in 3Q) as well as another RM9.6m impairment provision on the Idaman CLO (3QFY10: nil for Idaman CLO). This
would bring the total provisions made for Idaman to 100%. We do not expect any final dividend.

♦ … but expect strong earnings growth ahead ... We believe the group is poised to post strong earnings
growth in FY03/11 on the back of: 1) organic growth from loan expansion; 2) stable NIM (with potential upside,
albeit temporary, from the hike in interest rate); 3) higher non-interest income from improving economic and
capital markets conditions; and 4) absence of impairment provisions for its exposure to CLOs as well as pre-
emptive provisioning in FY03/09-10.

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 12 May 2010

♦ … with further upside potential from write-back of provisions. According to AFG’s 3QFY03/10 results
announcement, it has made pre-emptive provisioning or provisioning on high-risk accounts which are still
performing totaling RM45.5m. If these accounts remain performing and assuming that the write back would be
spread evenly in FY03/11-12, this could boost our net profit forecasts by circa 5-6% p.a.. As for the Idaman CLO,
out of the total RM800m issue size, the proportion of portfolio in default stood at RM191m (as at 12 Apr 2010,
according to RAM) while another RM128m have been fully repaid. This implies that AFG incurred a total loss on
the RM20m mezzanine tranche and RM91m out of the RM220m senior tranche (i.e. loss rate of 41%) (see Table
2). Assuming there is no further default (in view of the economic recovery) and the company makes full provision
of its exposure, AFG could potentially write back around RM129m in FY03/12 (CLO matures in Oct ’11). In
addition, there could be additional write backs if recovery from the defaulted portion is successful. Alternatively,
these provisions could serve as a buffer in the event higher allowances for impaired loans are required with the
implementation of FRS139. Either way (write back of provisions or lower impairment allowances), both would be
positive for capital ratios, which are, in our view, already robust.

Table 2. Idaman Capital CLOs

(RMm) Total Issuance AFG exposure Amt defaulted
Total 800 240 191
Super senior 480 - -
Senior 220 220 91
Mezzanine 20 20 20
Subordinated 80 - 80
Source: AFG, RAM, RHBRI estimates

Risks

♦ Risks to our view. The risks include: 1) slower-than-expected loan growth; 2) deterioration in asset quality; 3)
changes in market conditions that may adversely affect investment portfolios and capital market related income;
4) impact from Basel III; and 5) impact from the potential change in leadership on operations.

♦ Mitigating factors. The mitigating factors are: 1) niche in consumer and SME segments; 2) asset quality has
never been better (net NPL ratio already better than industry), thus, ample room to cushion potential rise in NPLs
if economic growth slows significantly; 3) recovery and robust outlook of the capital markets; and 4) robust
capital ratios of more than 10%.

Forecasts And Assumptions

♦ Forecasts. No change to our earnings forecasts for now.

♦ Earnings assumptions. Our earnings assumptions are based on 10% and 9% loan growth for FY10 and FY11-12
given that the niche in consumer (which will remain as the main driver of loan growth) and SME (which will
benefit from the economic recovery) segments. NIM is likely to be stable amidst competitive given the higher
rates on HP and mortgage loans. Non-interest income is expected to improve yoy on the back of the economic
recovery as well as the absence of impairment provision related to its exposure to CLOs. As for LLP, it should
normalise as the economic recovery implies less urgency and need to make aggressive pre-emptive provisioning.

Valuations And Recommendation

♦ Outperform recommendation maintained. We continue to like AFG given its niche in the consumer and SME
segments, strong deposit franchise, positive impact from a rate hike, absence of CLOs provisions and aggressive
pre-emptive provisioning, all of which, we believe, means AFG is poised to record strong earnings growth ahead.
Other positive factors are robust capital ratios, decent valuations and low foreign shareholding. Fair value of
RM3.27 is unchanged and is based on 15x (1x discount to sector benchmark) CY10 EPS. Maintain Outperform
call on the stock.

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Table 3 : Earnings Forecasts Table 4 : Ratio Analysis & Forecast Assumptions

FYE Mar (RMm) FY09a FY10F FY11F FY12F FYE Mar FY10F FY11F FY12F

Net Interest Income 825.5 823.5 860.9 919.6 Asset Quality (%)
(+ Islamic Banking) Gross NPL 4.47 3.97 3.47
Non-interest Income 154.3 145.2 301.5 325.6 Net NPL 2.20 1.94 1.69
Operating Income 979.8 968.7 1,162.4 1,245.2 SP / NPL 52.0 52.0 52.0
GP / Net Loans 1.5 1.5 1.5
Less: Overhead Loan Loss Coverage 85.80 90.07 95.55
Expenses (564.4) (524.9) (551.2) (578.7) Core Capital Ratio 10.4 10.9 11.4
Pre-provision RWCAR 14.4 14.8 15.3
Profit 415.4 443.8 611.2 666.5
Margins (%)
Less: Loan Loss Yields On Earnings Assets 3.69 3.59 3.54
Provisions (112.0) (86.7) (113.2) (105.7) Avg. Cost Of Funds 1.83 1.83 1.83
Operating Profit 303.3 357.1 498.0 560.8 Interest Spread 1.86 1.76 1.71
Un-adj NIM (ex-Islamic Inc) 2.01 1.93 1.90
Associates 0.0 0.0 0.0 0.0 Adjusted NIM (+Islamic Inc) 2.59 2.53 2.53
Pretax Profit 303.3 357.1 498.0 560.8
Profitability (%)
Less: Tax (74.4) (93.6) (130.5) (146.9) ROE 9.1 11.8 12.0
Effective Tax Rate 24.5 26.2 26.2 26.2 ROA 0.8 1.0 1.1
(%) Cost / Income Ratio 54.2 47.4 46.5
Profit After Tax 228.9 263.5 367.5 413.8 Expenses / Avg. Assets 1.6 1.6 1.6
Provisions / Avg. Net Loans 0.44 0.52 0.45
Minorities 0.2 (4.2) (3.2) (2.2)
Net Profit 229.1 259.3 364.3 411.6 Liquidity (%)
Source: Company data, RHBRI estimates Loan Deposit Ratio 75.7 78.8 82.0
Net / Gross Loan Growth 10.4 9.3 9.3
Deposit Growth 7.0 5.0 5.0
Source: RHBRI estimates

Chart 1: AFG Technical View Point

♦ The share price of AFG failed to penetrate a tough
resistance level at RM2.95 in Nov 2009, and began
a consolidation move.

♦ It plunged to below the RM2.59 level in Jan 2010,

but managed to sustain at between the RM2.43 and
RM2.59 region.

♦ When it pierced through the RM2.59 level again in

Feb 2010, it launched a sustained uptrend and
soared to a high of RM3.18 in Apr 2010.

♦ Only then, it began another round of profit-taking

activities, easing to below the 10-day SMA and
recently struggled to sustain at above the 40-day
SMA at RM2.97, near the RM2.95 resistance-turn-
support level.

♦ As the 10-day SMA moved lower, the risk is high

that it could spiral into a firmer downtrend, if it
ever loses the 40-day SMA soon.

♦ As a result, investors should prepare to turn

bearish if the 10-day SMA cuts below the 40-day
SMA, due to constant selling pressure.

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 12 May 2010

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
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information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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