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Disposal of interest in AIA AIG Takaful no big impact for AFG

by Ronnie Teo, ronnieteo@theborneopost.com. Posted on March 13, 2013, Wednesday

KUCHING: Alliance Financial Group Bhd’s (AFG) disposal of its 30 per cent equity interest in AIA AFG Takaful Bhd (AIA AIG Takaful) for a total cash consideration of RM45 million was anticipated by analysts and would probably not leave much impact for the group.

According to an analyst from RHB Research Institute Sdn Bhd (RHB Research) in a research note yesterday, the disposal announcement was not too surprising as management had previously said that it was searching for a new partner to replace AIA following AIA’s acquisition of ING’s Malaysian operations (ING has a tie up with Public Bank).

“From our conversation with management, we understand that there is nothing on the table at the moment with respect to a new partner,” it highlighted.

Another analyst from the research wing of Kenanga Investment Bank Bhd (Kenanga Research), Kelvin Ong, noted that AIA AFG Takaful was only recently incorporated on December 6, 2010 with an issued and paid-up share capital of RM100 million to carry out family takaful business.

“While the amount of disposal proceed is relatively small vis-à-vis its core capital of RM4.1 billion as at end-December 2012, this development is mildly positive for AFG, creating some space for its core capital ratio required under the new Basel III regime,” Ong opined.

“Other than that, the divestment is not expected to have a material effect on the group earnings. There are no changes in our earnings estimates as the joint venture was just breaking even previously.”

To recap, Ong said the momentum of AFG’s loan growth was seen as sustainable, driven by the bank’s aim of growing its small and medium enterprise (SME) and mortgage loans (targeting high-teen rates).

“Our loan growth forecast of 11 per cent year on year for AFG is thus highly achievable with the risk actually being on the upside. However, the immediate challenge is that continuous competitions could have a negative impact on its net interest margins (NIM).

“In fact, management has guided for a potential NIM compression of 10 basis points as the group’s strategy to focus on mortgage and SME loans will see it competing more in these two highly competitive segments, which could lower its asset yields and raise its funding cost.

“In addition, AFG’s earnings are likely to be unexciting and we expect another major leg up in its fee income to likely happen only in financial years 2014 or 2015 and hence, its cost to income ratio may not decline as fast as earlier expected.”

Meanwhile, the research side of MIDF Amanah Investment Bank Bhd (MIDF Research) believed that AFG would continue to focus on growing non-interest income.

“The group announced earlier of Alliance Bank’s sale of 70 per cent equity stake in Alliance Investment Management Bhd (AIMB) which manages unit trust funds eventually to KAF-Seagroatt and Campbell (KAF),” it highlighted.

“AIMB’s contribution to group pre-tax profit was marginal. We believe that the group is reducing its capital in business segments which are not performing and channelling its focus on driving on interest income growth which will be key driver of its ROE.”

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