Alliance’s 1QFY20 core net profit fell 36% QoQ and 44% YoY, coming in below estimates. The primary reason for the poor set of results was due to higher loan loss provision and impairment on financial investments. Also, NIM contracted, loans growth tapered, and asset quality weakened. Hence, we reduce our FY20- 22 bottom-line forecasts by 7-13%. Despite the weak showing, we find that value has emerged (due to recent price drop, now trading at -2SD P/B) and it is one of the few domestic banks that offers >5% cash dividend yield. Maintain BUY with a lower GGM-TP of RM3.70 (from RM4.20), based on 0.92x CY20 P/B.

Missed expectations. Alliance’s 1QFY20 core earnings fell 36% QoQ (-44% YoY) to RM77m, after adjusting for one-off goodwill impairment for its stockbroking business in 4QFY19. This missed estimates, made up only 13% of our and consensus full-year forecasts due to unexpectedly high bad loans provision and impairment on financial investments.

Dividend. None proposed as Alliance only divvy in 2Q and 4Q of its financial year.

QoQ. The 36% decline in core net profit was due to higher loan loss provision (+40%) and impairment on financial investments, amounting to RM49m. Also, total revenue growth was softer, rising only 1% given that net interest margin (NIM) contracted 10bp to 2.40%. However, these were offset by: i) robust non-interest income (NOII, +17%) as investment gains doubled and (ii) the 3% opex drop, helped to fuel positive Jaws.

YoY. Negative Jaws from quicker opex growth (+8%) vs total income (+2%), 50% rise in allowance for bad loans, and RM49m impairment on financial investment, caused core bottom-line to dip by 44%. The jump in opex was owing to higher depreciation and amortisation charges (+2-fold) along with personnel cost (+6%).

Other key trends. Loans growth tapered to 5.5% YoY (4QFY19: +6.0%) but deposits expanded quicker at 8.2% YoY (4QFY19: +5.3%). Sequentially, loan-to-deposit ratio (LDR) nudged down 1ppt to 94%. As for asset quality, gross impaired loans (GIL) ratio increased 18bp to 1.3%, no thanks primarily to 3 bad large customer accounts in the manufacturing and wholesale segments.

Outlook. We see NIM to continue to slip in subsequent quarters given the full 9 months impact from May-19’s OPR cut and growing price-based competition for loans. That said, we do not think it would be overly severe considering it is shifting its asset mix to better yielding risk adjusted return loans. Also, we expect its relatively robust lending growth momentum (+5-6%) to chug along since Alliance has an innovative suite of products and services. While for asset quality, despite 1QFY20’s deterioration, we expect some improvement from gradual recoveries and proactive credit management practices.

Forecast. We cut FY20-22 net profit forecasts by 7-13% to reflect the poor set results (from higher incremental net credit cost of 7-10bp and RM49m impairment on financial investment) along with softer NIM assumption (factoring in another -2bp).

Maintain BUY but with a lower GGM-TP of RM3.70 (from RM4.20), following our earnings cut and based on 0.92x CY20 P/B (from 1.05x) with assumptions of 8.9% ROE (from 9.7%), 9.4% COE, and 3.0% LTG. This is below its 5-year mean of 1.17x and the sector’s 1.04x. The discount is fair given its falling ROE trend (1-2ppt lower vs 5-year mean and sector average). Despite the weak showing, we find that value has emerged (due to recent price drop, now trading at -2SD P/B) and it is one of the few domestic banks that offers >5% cash dividend yield.

Source: Hong Leong Investment Bank Research - 28 Aug 2019