Investment Highlights

• We maintain our HOLD recommendation on Alliance Bank Malaysia (ABMB) and fair value of RM2.90/share based on a FY20 ROE of 7.7%, pegging the stock to a P/BV of 0.8x. Nevertheless, we tweak our FY21/22 earnings by -0.9%/-7.1% after our recent company visit to account for lower asset yields with the tightened underwriting of new Alliance One Account (AOA) loans.

• We met the management recently for updates. Recall that AOA is a key higher-yielding product of Alliance Bank allowing overdraft (OD) to be granted with housing loans (HL) to refinance borrowers’ facilities from other financial institutions. The margin of advance for AOA can be up to 90.0% of the value of a residential property. A high mix of OD – up to 60.0% of the total credit facilities with the remaining 30.0% in HL – may be accorded to borrowers. We understand that the effective interest rate (EIR) for AOA is circa 7.0% p.a.

• The upticks in impaired AOA loans (mainly the pre-2018 portfolio) seen recently are largely coming from loan accounts where mortgages/housing loans are tied to higher portions of OD facilities that have been heavily utilized by borrowers.

• Beside AOA, impairments of the conventional mortgage loans (the pre-2013 portfolio) were also seen to have risen in 2Q20.

• We understand that the impaired AOA and conventional mortgage loans were related to borrowers’ who have overleveraged their investments. Hence, the continued slowdown in the property and rental markets are likely to have impacted these borrowers’ repayment abilities.

• Owing to the adoption of foreclosure/discounted valuation of properties against the outstanding loans, provisions were taken for the impaired AOA and conventional mortgage loans. Hence, this has contributed to the increase in annualised credit cost to 0.70% in 2Q20 from 0.52% in 1Q20.

• To further mitigate risk of impairments in the AOA portfolio, the group will be conducting reviews on AOA loans with high OD limits. This is to look into possibilities of reducing the high OD limits to match the borrowers’ recent profiles. In our opinion, efforts to trim the OD limit of borrowers with high utilization of the facilities will be challenging.

Source: AmInvest Research - 11 Dec 2019