MIDF Sector Research

Author: sectoranalyst   |   Latest post: Tue, 7 Jan 2020, 10:50 AM


Alliance Bank - Weighed Down by Management Overlay Provisions

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  • Results were within expectations
  • Net profit rebounded supported by higher NOII and lower OPEX
  • Moderated by higher provisions due to management overlay
  • GIL ratio stable
  • Slower pace gross loans growth, CASA led deposits growth
  • Situation seems stable post loan moratorium
  • Tweaking FY22 earnings forecast
  • Maintain NEUTRAL with revised TP of RM2.65

Within expectations. The Group registered 1HFY21 net profit of RM208.3m. This was within expectations as it came in at 50.9% and 51.4% of ours and consensus’ full year estimate respectively.

Robust income growth. Net profit 1HFY21 grew +8.4%yoy supported by robust income growth. Net income came in +7.7%yoy higher boosted by +28.4%yoy growth in NOII (both conventional and Islamic), to RM229.5m. The strong NOII was due to higher treasury and investment income which rose +RM37.2m.

NII rebounded. NII (conventional & Islamic) for 1HFY21 grew +2.0%yoy to RM666.5m as it recovered in 2QFY21 where it grew +4.8%yoy to RM339.4m (vs. -0.8%yoy in 1QFY21). Lower funding cost was the main contributor for the NII growth in 1HFY21. Meanwhile, NIM fell -15bps due to the OPR cuts, the bulk of which were in 1QFY21.

OPEX came in lower. OPEX fell by -3.8%yoy due to lower personnel expenses and reduction in IT and professional fees. As a result, PPOP grew +17.8%yoy.

Weighed down by higher provisions. The Group booked in higher provisions of +33.3%yoy. This was attributable to the management overlay of RM210m. We opine that this was prudent as the Group prepares for potential pressure on asset quality following the end of the loan moratorium period. Management is guiding net credit cost of ~100bp for FY21 but 1HFY21 annualised net credit cost had surpassed that. We posit that provisions are likely to come down slightly in 2HFY21. However, the management guided that provisions will remain elevated in FY21 in order for more robust FY22.

GIL ratio stable. GIL ratio improved to 1.7%. However, we must bear in mind that it was still during the loan moratorium period. We expect asset quality to come under pressure after the loan moratorium period.

Slower pace of gross loans growth. Gross loans as at 2QFY21 grew +1.2%yoy to RM43.8b (vs. 1QFY21: +1.7%yoy to RM43.4b). Main drivers were SME lending (+7.4%yoy to RM9.8b) and consumer banking (+2.5%yoyo to RM23.7b). However, it was moderated decline in corporate and commercial segment of -6.6%yoy to RM10.3b. This was due to the Group reducing its exposure in this segment to minimize fallout of Covid-19. We have to note that the new SME loans backed by the various Government schemes which mitigate some of the risk.

Deposits growth led by CASA. Customer deposits grew +5.9%yoy to RM49.4b. CASA continued to lead the growth as it expanded +16.6%yoy to RM20.1b. This was in tandem with the industry trend. We opine that this could be due to depositors wanting to maintain sufficient liquidity. Meanwhile, fixed deposits were flat at RM26.0b.

Post loan moratorium – so far so good. Based on its loans book as at end 2QFY21, circa 11.4% or RM5b are on targeted assistance program while 86% have continued repayments. Of the targeted assistance, 42% or RM2.1b is on 3- month extended moratorium with 85% coming from consumer, mostly for mortgages. The remainder (RM2.9b) which is under payment relief assistance (“PRA”), with the bulk going to SMEs (45%) followed by consumer (31%) and corporates (28%). From the PRA to SMEs and corporates, 20% are in highly affected sectors. From all this data, we gathered that the situation post loan moratorium seems to be stable at the moment. Nevertheless, we estimate that circa RM400m of its loans book carries the highest risk, being in highly affected sectors and receiving assistance. In the event that these loans turn non-performing, GIL ratio will increase to about 2.6%.

No change to earnings. We maintaining our earnings forecast for FY21 but tweaking our FY22 to RM516.m.

Valuation and recommendation. In general, we believe that it had been a good 1HFY21 for the Group. The strong PPOP growth had allowed the Group to increase the management overlay provisions which provides some buffer. However, we opine that this could portend some stress to asset quality post loan moratorium. While current situation seems stable, we are closely monitoring it especially given the recent resurgence of new Covid-19 cases. We believe that the Group will continue to face pressure in asset quality in FY21 as there is potential that credit cost and GIL ratio might spike. However, we expect that NOII will be a moderating factor, coupled with the controlled OPEX. All-in, we are maintaining our NEUTRAL call on the stock but with revised TP of RM2.65 (previously RM2.10) as we pegged its FY22 BVPS to a PBV higher of 0.7x (from 0.5x) given the brighter outlook following positive development of the vaccine

Source: MIDF Research - 30 Nov 2020

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