Alliance’s 1Q19 net profit of RM136.4m (QoQ: +20.8%; YoY: +1%) came within expectations, accounting for 24-25.3% of consensus and our full-year forecasts. Loan growth accelerated for 2 quarters by 3.8% YoY. Total deposits still weak at -1.8% YoY as Alliance beef ups its expensive deposits. No change to our forecasts, and GGM-derived TP of RM4.80, (COE 10.8% and WACC of 8.6%). Maintain BUY rating.

Results in line. 1Q19 net profit of RM136.4m (QoQ: +20.8%; YoY: +1%) came within expectations, accounting for 24-25.3% of consensus and our full-year forecasts.

QoQ. Net profit surged by 20.8% to RM136.4m, as lower NOII was more than mitigated by higher NII and lower overhead expenses. Higher forex losses and lower net gains from investment securities contributed to the weaker NOII while MTM gains fill up the slack with the gains of RM41m.

YoY. Net profit was flattish at RM136.4m as higher operating income was offset by higher credit losses on loans and expenses by +23.4% YoY and 3.8% YoY respectively. Higher credit loss was expected as Alliance embraced MFRS9 for the first time, this dragged net credit cost at 9.2bps, on course to meet its target of 35bps in FY19. Alliance still booked accelerated expenses as it continues to build its sales force to sustain growth in Alliance One Account and SME forces.

Loans. Loan growth accelerated for the 2nd straight quarter by 3.8% YoY, as the growth was supported by higher RAR loans of +21.3% YoY while lower RAR loans moderated by 4.4%, mostly caused by traditional mortgage and hire purchase. AOA gained strong traction, booked RM1.5bn loan so far, and unsecured consumer surged by 20.2% YoY. High RAR loan now accounts 37% of total loan portfolio. Strong growth in AOA (which carries higher asset yields) has led Alliance NIM higher to 2.43% vs. 2.32% in 1Q18.

Deposits. Total deposit weakened by 1.8% YoY as the growth in both CASA (+0.5% YoY) and fixed deposits (+2.3% YoY) was more than offset by weaker NIDs and other deposits that decreased 82.6% YoY and 24.7% YoY. On a more positive note, CASA composition advanced by 210bps YoY to 37.4%, as the growth in CASA was linked with its latest products of Alliance at Work that gained strong momentum by employers.

Asset quality. NPL increased by 46.5% YoY, this was led by non-residential and working capital loan by 99.5% and 78.3% respectively. This pushed GIL ratio to 1.57% vs. 1.12% in 1Q18. Management highlighted the situations in the working capital is not alarming as the increase is in tandem with the strong loan growth, and the weakness are rather broadbased with no specific or large account associated with this.

Forecast. We Leave Our Forecast Unchanged.

Maintain BUY, TP: RM4.80. Alliance has shown very good progress in its AOA and SME segment of which it translated into high loan growth and better NIM upwards. However we understand expenses will be tapered off in FY19 as Alliance completes its initiative on both products. Maintain BUY, unchanged TP of RM4.80 based on GGM-derived of (i) COE of 10.8%, and (ii) WACC of 8.6%.

Source: Hong Leong Investment Bank Research - 3 Sept 2018