KUALA LUMPUR: Hwang DBS Vickers Research (HDBSVR) has initiated coverage on Alliance Financial Group (AFG) with a Buy rating and RM3.45 target price.

HDBSVR said on Tuesday, March 30 AFG has successfully redefined its position with a niche in the consumer and SME markets following three years of transformation.

“And the recovering consumer sentiment and spending power should pave the way for AFG to aggressively scale up its domestic franchise. Its clean balance sheet post-transformation is a stable platform to launch its growth strategy,” it said.

HDBSVR said earnings would be driven by:

i) NIM upside from the imminent interest rates hike, given its higher share of variable rate loans (84% vs industry average of 65%) and low-cost deposits (41% vs industry average of 26%);

(ii) non-interest fee-based income particularly from the treasury and wealth management units, and

(iii) possibly further earnings upside from recoveries. AFG also tracks well in terms of asset quality improvement, with net NPL ratio stabilizing at 1.9%.

HDBSVR said AFG’s prospective ROE profile (c.14%) seems attractive given that it is trading at only 1.4x CY10 BV currently. Its 24% CY09-11 earnings CAGR is also superior to industry average of 17%. Coupled with being the smallest bank with a scaleable domestic franchise, AFG is an attractive acquisition target.

“Initiate coverage with Buy rating. Our RM3.45 target price, implying 1.6x CY11 BV, is based on the Gordon Growth Model, and assumes 5% long term growth, 14% ROE, and 10.5% cost of equity. We like AFG as a small cap pure domestic play with a scaleable niche growth strategy and for M&A potential,” it said.