No surprises, Alliance’s 4QFY19 core profit grew 7% YoY due to positive Jaws but were capped by lower NOII. Besides, we saw widening of NIM, steady loans growth, and better asset quality. However, we lowered our FY20-21 forecasts by 2-3% to account for softer NOII and weaker NIM outlook. Its risk-reward profile is now skewed to the upside as recent selling has been overdone, in our view, as Alliance being one of the most affected banks under a falling interest rate climate has been well reflected in its poor share price showing. Upgrade to BUY but with a lower GGM-TP of RM4.20 (from RM4.40), based on 1.09x CY19 P/B.

Within expectations. Excluding the one-off goodwill impairment for its stockbroking business, Alliance posted 4QFY19 core earnings of RM121m (-19% QoQ, +7% YoY), bringing FY19 adjusted bottom-line to RM546m (+11% YoY). This was within both our and consensus estimates, forming 97% and 95% of our respective full-year forecasts.

Dividend. A 2nd interim DPS of 8.2sen (+21% YoY) was declared, lifting full-year DPS to 16.7sen (+9% YoY).

QoQ. The -19% drop in core earnings was due to negative Jaws as total revenue fell 4% vs a 3% rise in opex; this came on the back of weaker non-interest income (NOII, -18%) given subdued investment performance (-39%), lower forex gain (-92%), and fees (-9%). That said, net interest margin (NIM) held steady at 2.57% (+1bp). Overall, it was further aggravated by higher loan loss provision (+22%).

YoY. The lower opex (-4%) and effective tax rate (-3ppt on adjusted PBT), drove core bottom-line expansion of 7%. That said, it could have been better if not for the lower NOII (-34%); fee-related and investment income fell -16% and -76% respectively.

YTD. Similar to YoY showing, core net profit grew 10% on the back of positive Jaws and lower effective tax rate (-4ppt to 24%). However, poor NOII (-19%) and the rise in allowance for impaired loans (+40%), capped overall results from doing better.

Other key trends. Loans growth was maintained at 6.0% YoY (3QFY19: +6.0%) but was followed suit by a tad slower deposits expansion of 5.3% YoY (3QFY19: +5.6%). Sequentially, loan-to-deposit ratio (LDR) tapered to 95% (-2ppt). As for asset quality, it was still improving as gross impaired loans (GIL) ratio fell 16bp QoQ to 1.12%.

Outlook. By further shifting its asset mix to better yielding risk adjusted return loans, NIM slippage should be mitigated (FY20: -5bp). Also, we expect its relatively robust lending growth pace (+5-6%) to chug along since Alliance has an innovative suite of products and services. For NOII (FY20:+18%), it should improve as: (i) the treasury arm is likely to benefit from falling MGS yields, (ii) more new structured investment products being introduced to the market, and (iii) the scaling up of its bancassurance business (tied-up with Zurich recently). Hence, total income is seen to be upbeat (+5%), leading to positive Jaws. Besides, we expect asset quality to remain steady.

Forecast. We cut FY20-21 earnings forecasts by 2-3% to account for weaker NIM outlook (following the recent OPR cut) and toned down our NOII assumption a little as we were too bullish prior to this reporting season.

Upgrade to BUY (from Hold) but with lower GGM-TP of RM4.20 (from RM4.40), as we cut earnings and based on 1.09x CY19 P/B (from 1.12x) with assumptions of 9.7% ROE (from 9.9%), 9.2% COE, and 3.0% LTG. This is below its 5-year mean of 1.20x but largely in line with the sector’s 1.14x. The discount is fair given its falling ROE trend (1ppt lower vs 5-year mean). Despite the earnings and TP cut, we reckon the risk-reward profile looks skewed to the upside, following recent share price weakness.

Source: Hong Leong Investment Bank Research - 6 Jun 2019