As expected, Alliance’s 3QFY19 net profit grew 6% QoQ, aided by positive Jaws but was mitigated by higher loan loss provision. That said, we saw widening of NIM, quicker loans growth, and better asset quality. However, LDR optimization would be increasingly more difficult to implement, in our opinion, leading to gradual slippage in NIM. Our forecasts are unchanged. There are no compelling catalysts to re-rate the stock, despite trading at -1SD to both its 5-year mean P/B and P/E. Retain HOLD with a GGM-TP of RM4.40, based on 1.12x CY19 P/B.

Within estimates. Alliance registered 3QFY19 bottom-line of RM149m (+6% QoQ, +22% YoY), bringing 9MFY19 net profit to RM426m (+12% YoY). This was in line with expectations, making up 76% of our and consensus full-year estimates.

Dividend. None declared as Alliance usually does not divvy during its 3Q results.

QoQ. The 6% earnings increase was thanks to positive Jaws, created by the uptick in total income (+5%), but was mitigated by higher loan loss provision (+55%). We saw strength in non-interest income (NOII, +7%) given better investment performance (+26%) coupled with a forex gain of RM5.3m vs a loss of RM0.7m in 2QFY19. Also, net interest margin (NIM) expanded by 11bp to 2.56%.

YoY. The quicker total revenue growth (+8%), lower opex (-9%), and effective tax rate (-17ppt to 21%), helped to drive net profit up by 22%. However, performance could be better if not for the RM33m bad loan allowances incurred vs a net write-back of RM8m in 3QFY18 along with poor NOII (-14%), stemming across the board with fee-related, investment, and ‘other’ income declining 13%, 16% and 19% respectively.

YTD. Similar narrative to YoY showing, where bottom-line jumped 12% given positive Jaws and lower effective tax rate (-5ppt to 24%). Again, weak NOII (-14%) and higher allowance for impaired loans (+63%) were dampeners, capping results from excelling further.

Other key trends. Loans growth accelerated by 6% YoY and was accompanied by a meaningful built up in deposits (+5.6% YoY). Besides, loan-to-deposit ratio (LDR) continued to climb to 97% sequentially (+2ppt). We noticed asset quality improved as gross impaired loans (GIL) ratio declined 9bp QoQ to 1.28%.

Outlook. Although NIM is seen to improve in FY19 (due to OPR hike in 4QFY18, skewing portfolio mix towards better risk adjusted return loans, and optimization of LDR), we see slippage in FY20-21; a 6bp rise in FY19 followed by 2bp decline in the two subsequent years. While for loans, we expect subdued growth of 3-4% in FY19- 21 given challenging economic climate. That said, asset quality took a hit in 1QFY19 (but is improving now) and hence, we pencilled in a higher net credit charge run-rate of 32-34bp for FY19-21 vs 24bp in FY18.

Forecast. Unchanged as 3QFY19 results were within estimates.

Retain HOLD and GGM-TP of RM4.40, based on 1.12x CY19 P/B with assumptions of 9.9% ROE, 9.2% COE, and 3.0% LTG. This is below its 5-year mean of 1.23x but in line with the sector’s 1.18x. The discount is warranted considering its falling ROE trend, which is 1ppt lower than its 5-year average. Hence, we reckon its current valuation of -1SD to both its 5-year mean P/B and P/E are justifiable.

Source: Hong Leong Investment Bank Research - 1 Mar 2019