Investment Highlights

• We maintain our BUY recommendation on Alliance Bank Malaysia (ABMB) with a lower fair value (FV) of RM4.20/share from RM4.40/share previously. The revised FV is based on a decrease in FY24F ROE to 10.9% (previously: 11.1%). We tweaked our FY23F/24F/25F earnings by -4.1%/-2.1%/-0.3% to reflect slightly higher CI ratio assumptions.

• We continue to peg the stock to a P/BV of 1.0x with no change to our neutral 3-star ESG rating.

• Recall as at end-3Q23, the group has 72.8% of its entire securities portfolio or RM8.4bil in fair value invested in other comprehensive income (FVOCI) securities. In contrast, the amount invested in fair value through P & L securities (FVTPL) was only RM306mil or 2.7% of the total securities portfolio. As a result of the higher MGS yields compared to pre-pandemic levels, the group’s FVOCI reserves have declined to -RM214mil.

• Meanwhile, ABMB has placed RM2.8bil or 24.6% of its total securities portfolio under financial assets at amortised cost or held-to-maturity (HTM). The interest rate impact on the valuation of HTM securities are unrecorded. However, based on our estimate, the unrealised losses on HTM assets amounted to RM54mil as at end-3Q23, and the impact is manageable with only a 13bps drop on the group’s total capital ratio to 20%.

• 90% of the securities portfolio are invested in Malaysian Government Securities (MGS) for liquidity purposes with the remaining balance in corporate bonds and sukuks, which are related to the deals of its investment advisory business (ECM and DCM). In 2022, the investment advisory business was transferred to the group’s Islamic Bank after the disposal of its stock broking business to Philip Capital.

• On a comforting note, the group does not hold bonds or securities of foreign corporate issuers.

• Total additional tier-1 capital was only RM350mil representing 4.3% of ABMB’s total capital of RM8bil.

• The group will continue to enhance its existing IT platforms. It will accelerate its IT transformation in line with its ACCLER8 strategy to achieve a top quartile ROE and loan growth above industry by 2027.

• As at end-Feb 2023, total loans under relief amounted to RM1.35bil or 2.9% of ABMB’s loan book. This comprised of RM909mil under payment relief assistance (mostly consumer loans) and RM443mil loans, largely SME and other business financing, which already graduated from relief assistance but still placed under observation.

• We expect the delinquency trend for 4Q23 to be similar to 3Q23 with upticks in the percentage of 30+ days past due (dpd) in the consumer, SME, commercial and corporate loans. Upticks in the GIL ratio of consumer loans is expected in 4Q23. Nevertheless, the GIL ratios of SME, commercial and corporate loans are likely to still hold up in 4Q23.

• We see a likelihood for the overall GIL ratio to inch up in 4Q23 from 1.93% in 3Q23. This is due to certain consumer loans which may still exhibiting some weaknesses after the expiry of the payment relief programmes.

• With the SMEs and other business loans now placed under observation are expected to graduate from the pool of loans under relief assistance, a further gradual release in management overlays is anticipated ahead. In 4Q23, we do not expect any further increase in provisions based on refinements to the macro-economic variables (MEVs) to offset the release in management overlays. Hence, the full amount of any reversals of pandemic-related overlays will be positive to 4Q23 earnings.

• The group is scheduled to release its results on 30 May 2023. We expect the group’s earnings in 4Q23 to be decent, supported by slightly higher than the guided loan growth of 4%-5%. This is based on recently improved loan activities, applications and approvals seen in the Feb 2023 BNM statistics. With the recent decline in MGS yields, we foresee a stronger treasury and investment income in 4Q23. However, NIM is expected to be compressed in 4Q23, contributed by further repricing of deposit rates which will increase funding cost. For the full FY23F, we do not expect any negative surprises to guided NIM of 2.55%-2.6% while credit cost is expected to come in within management’s guidance of 35bps-40bps.

• The stock is trading at an undemanding FY24F P/BV of 0.8x and offers an attractive dividend yield of 6.6% based on normalised dividend payout. Fundamentals are improving with better asset quality. A gradual release of management overlays will lift the group’s earning

Source: AmInvest Research - 10 Apr 2023