With share price retreating 7% YTD, we turned bullish on Alliance, viewing this as an opportune time to accumulate on weakness. Besides being undervalued, we like Alliance for its product innovation, uncompromising strict risk and return-oriented business strategy. Also, the smaller size advantage it has over peers, allows room to be nimble, helping to better navigate through the tough operating climate (ability to execute its plans more effectively). No changes are made to our FY20-21 earnings forecasts and introduced FY22 estimates. Retain BUY and GGM-TP of RM4.20, based on 1.09x CY19 P/B.

Alliance is one of the poorer performing banking stocks under our coverage as share price slumped 7% YTD, given market views it among the most affected under a falling interest rate climate. In our view, the selling was overdone and hence, we upgraded the stock (to BUY) during the recently concluded reporting season. In this write-up, we further reiterate and support our positive investment thesis on Alliance.

Apt actions to eke out top-line growth. Considering management’s continual focus to drive up better risk adjusted return (RAR) loans, we believe NIM compression can be mitigated (FY20: -5bp; guidance: 5-10bp slippage). To recap, there was a 10bp NIM expansion in FY19 and we estimate that 50% of it was attributed to better RAR loans, which saw quicker growth (+27%) and higher overall lending mix (+7ppt). Besides, we expect robust 6% rise in FY20 loans (guidance: +7%, FY19: +6%) since Alliance has an innovative suite of products and services (able to grab market share from peers). Also, FY20 non-interest income (NOII) should improve (+18%; FY19: - 19%) on: (i) falling MGS yields, (ii) introducing new structured investment products, and (iii) scaling up of its bancassurance business.

Keeping a close eye on costs. A slight positive Jaws should materialize in FY20, seeing a faster 5% revenue growth pace (FY19: +3%) vs an opex inflation estimate of 3% (FY19: -2%). Although management is placing more emphasis on right-sizing its back office functions (to streamline and reduce costs), we gathered that additional sales force expenses have to be incurred to help to further propel the take-up of its Alliance One Account (AOA) and wealth management products; the move is expected to boost top-line growth. Overall, FY20’s cost-to-income ratio (CIR) is projected to be at 47% (FY19: 47.8%; guidance: c.48%).

Seasoning AOA, not a concern. In FY19, gross impaired loans (GIL) ratio improved to 1.12% (FY18: 1.43%) while normalised net credit cost (NCC) was stable at 33bp (FY18: 32bp). However, the seasoning of its AOA portfolio along with the moderation in economic growth leads to an expectation of higher 34bp NCC assumption for FY20 (vs guidance of c.35bp); the former is not something to be overly concerned about, in our opinion, as we understand that AOA’s RAR is c.3x higher than conventional mortgage and it is backed by collateral.

Forecast. No changes are made to our FY20-21 earnings forecasts and we introduce FY22 estimates.

Retain BUY and GGM-TP of RM4.20, based on 1.09x CY19 P/B with assumptions of 9.7% ROE, 9.2% COE, and 3.0% LTG. This is beneath its 5-year mean of 1.19x but largely in line with the sector’s 1.13x. The discount is fair given its falling ROE trend (1ppt lower vs 5-year mean). We continue to like Alliance for its product innovation, uncompromising strict risk and return-oriented business strategy. Besides, we believe value has emerged (due to recent price drop) and notably, it is the only domestic bank, offering close to 5% cash dividend yield.

Source: Hong Leong Investment Bank Research - 21 Jun 2019