KUCHING: The focus on risk adjusted returns should pan out to be positive for Alliance Financial Group Bhd (AFG) over the longer term, but near-term, analysts expect income growth to stay muted as efforts to rebalance the loan portfolio and derisk the balance sheet will need time.
RHB Research Institute Sdn Bhd (RHB Research) noted that asset quality also appears to be under control, although the current low credit cost is unlikely to be sustainable.
The impact from AFG’s ongoing rebalancing of the loan portfolio continues to have a positive effect on average asset yield said the research house but the trade-off from the rebalancing, meaning that the impact to bottomline has yet to be meaningful.
Also, despite FY15’s cost rationalisation exercise, overheads remain under pressure from rising staff cost due to collective agreement adjustments.
Asset quality, however, was intact and helped keep 3QFY16 credit cost at a mere seven basis points (bps), but this is unlikely to be sustainable.
“While 9MFY16 net interest margin (NIM) and credit cost appear to be trending better than the guidance, cost pressures and weaker loan growth are likely to mean FY16 ROE misses the 12-13 per cent target.
“Looking ahead to FY17, AFG thinks household asset quality could be under pressure from rising unemployment levels and estimates an additional RM25 million in loan impairment allowances would be required from this segment. AFG sees FY17 credit cost moving up to 25-30 bps.
“Oil and gas exposure is not a concern for management, forming less than one per cent of the loan book,” said RHB Research.