Alliance’s 3QFY20 earnings jumped 16% QoQ (within expectations) due to lower loan loss provision and larger ECL writebacks on financial investments. Also, sequential NIM improved and loans growth momentum held up well. However, asset quality weakened. Regardless, we reduce FY21-22 profit by 3% to factor in higher NIM slippage. We continue to believe most of the negatives pertaining to the stock have been priced in (now trading at more than -2SD P/B and valuation is beneath global financial crisis levels). Maintain BUY but with a lower GGM-TP of RM3.05 (from RM3.15), based on 0.77x CY20 P/B.

Within estimates. Alliance’s 3QFY20 posted net profit of RM134m (+16% QoQ, -10% QoQ) and in turn, brought 9MFY20 earnings to RM326m (-23% YoY). This was within expectations, making up 72-73% of our and consensus full-year forecasts.

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

QoQ. The 16% jump in bottom-line was owing to lower loan loss provision (-46%) and larger expected credit loss (ECL) writebacks on financial investments (+6-fold). If not for these, pre-provision profit would have instead fallen 8% given negative Jaws; non interest income (NOII) declined 15% due to forex losses but was mitigated partly by net interest margin (NIM) improvement (+5bp). Besides, opex was up 7%.

YoY. Earnings dipped 10% on the back of negative Jaws from faster opex growth of 6ppt vs total income, coupled with the rise in allowance for bad loans (+28%).

YTD. The RM49m impairment on financial assets in 1QFY20 and higher impaired loan provision (which doubled) dragged earnings down by 23%. Total revenue grew 3%.

Other key trends. Loans growth was sustained at 5.2% YoY (2QFY20: +5.5%) while deposits picked up pace to 9.5% YoY (2QFY20: +7.4%). Sequentially, however, loan to-deposit ratio (LDR) continued to hover at 93%. As for asset quality, gross impaired loans (GIL) ratio rose 20bp QoQ due to mortgage and personal financing segments.

Outlook. NIM slippage is seen to return in 4QFY20, no thanks to the recent OPR cut. However, gradual recovery should ensue in the following 3-6 months from downward deposit repricing (lagged impact). Also, we still expect a V-shaped earnings recovery in FY21 from downward normalizing net credit cost. Besides, we are not particularly worried of the regression in asset quality as we see progressive improvement through proactive credit management practices.

Forecast. Despite 9MFY20 results coming in within expectations, we reduce FY21-22 profit by 3% to factor in higher NIM slippage.

Keep BUY but with a lower GGM-TP of RM3.05 (from RM3.15), following our profit cut and based on 0.77x CY20 P/B (from 0.79x) with assumptions of 8.1% ROE (from 8.3%), 9.7% COE, and 3.0% LTG. This is beneath its 5-year average of 1.08x and the sector’s 0.92x. The discount is fair given its falling ROE trend (1-2ppt lower vs 5-year and sector mean). Overall, we think most of the negatives have been priced in (now trading at more than -2SD P/B and valuation is below global financial crisis levels). Besides, it is offering attractive cash dividend yield of 6-7%.

Source: Hong Leong Investment Bank Research - 9 Mar 2020