Although Alliance’s 2QFY20 earnings improved 51% QoQ (due to positive Jaws and no impairment on financial assets), results were below expectations given surprisingly high bad loans provision. That said, NIM slipped and asset quality weakened but loans growth momentum was sustained. Overall, we reduce our FY20-22 net profit forecasts by 2-4%. Regardless, we still believe that most of the negatives have been priced in (now trading at more than -2SD P/B and valuation is beneath global financial crisis levels). Hence, maintain BUY but with a lower GGM-TP of RM3.30 (from RM3.40), based on 0.82x CY20 P/B.

Below expectations. Alliance’s 2QFY20 net profit increased 51% QoQ (-18% YoY) to RM116m and brought the 1HFY20 sum to RM192m (-31% YoY). However, cumulative 1H earnings still missed expectations (even with the QoQ improvement), making up only 39-41% of our and consensus full-year forecasts (due to surprisingly high bad loans provision).

Dividend. A 1st interim DPS of 6sen (-29% YoY) was declared. Ex-date: 12 Dec-19.

QoQ. The 51% net profit rise was due to positive Jaws and no impairment on financial assets; total revenue expanded 6% given robust non-interest income (NOII, +45%) as trading and forex gain rose 2- and 9-fold respectively. However, these were offset by net interest margin (NIM) slippage (-6bp) and higher loan loss provision (+39%).

YoY. Bottom-line dipped 18% on the back of the increase in allowance for bad loans (tripled). Otherwise, pre-provision profit was up 11% from positive Jaws.

YTD. The RM49m impairment on financial assets in 1QFY20 and higher impaired loan provision (which doubled) dragged earnings down by 31%. Total revenue grew 5%.

Other key trends. Loans growth was sustained at 5.5% YoY (1QFY20: +5.5%) while deposits tapered slightly to 7.4% YoY (1QFY20 +8.2%). Sequentially, however, loan to-deposit ratio (LDR) continued to hover at 94%. As for asset quality, gross impaired loans (GIL) ratio rose 36bp to 1.66%, mainly due to mortgage, personal financing, and working capital segments.

Outlook. Over the next 3 months, NIM is seen to improve from: (i) downward deposit repricing and (ii) SRR ratio cut. Also, after chalking in 2 back-to-back quarters of poor financial showing, we expect the remaining FY20 to pick up pace from downward normalizing net credit cost while a V-shaped recovery can be expected in FY21. As for the regression in asset quality, we are not majorly worried as we see improvement from gradual recoveries and proactive credit management practices.

Forecast. We cut FY20-22 net profit forecasts by 2-4% to reflect the poor set results (from higher incremental net credit cost of 3-6bp).

Maintain BUY but with a lower GGM-TP of RM3.30 (from RM3.40), following our earnings cut and based on 0.82x CY20 P/B (from 0.86x) with assumptions of 8.3% ROE (from 8.5%), 9.4% COE, and 3.0% LTG. This is below its 5-year mean of 1.13x and the sector’s 1.01x. The discount is fair given its falling ROE trend (1-2ppt lower vs 5-year mean and sector average). Overall, we think most of the negatives have been priced in (now trading at more than -2SD P/B and valuation is beneath global financial crisis levels). Besides, it is offering attractive cash dividend yield of 5-6%.

Source: Hong Leong Investment Bank Research - 4 Dec 2019