Post-speaking to management last week, we believe Alliance has the financial muscle to weather the Covid-19 crisis. Although FY20 NCC is likely to be higher (vs earlier guidance) and there could be some MFRS9-related modification day 1 loss on fixed rate loans (in 1QFY21), we draw comfort that the bank is not facing any liquidity crunch and remains committed to pay dividends. Overall, we cut our FY20-22 profit forecasts by 2-5% but we think most of the negatives have been priced in (now trading at more than -2SD P/B and valuation is significantly below global financial crisis levels). Hence, maintain BUY but with a lower GGM TP of RM2.35 (from RM2.50), based on 0.59x CY20 P/B.

We spoke to management recently for some operational updates. Although the overall tone was cautious (given the Covid-19 outbreak), we believe Alliance has the financial muscle to weather this storm.

Asset quality may not blow up. Alliance is still unable to quantify the manufacturing loans at risk due to Covid-19. However, those affected within the hotel and transport segments, makes up c.3% of total loans. Separately, we understand 80% of eligible customers for the 6-mth loan auto deferment opted to stay in, when contacted. Also, troubled loans will be rescheduled and restructured (R&R). Hence, affected borrowers can better navigate through the movement control order (MCO) and beyond, while easing pressure on asset quality.

Highly secured gross impaired loans (GIL). While the headline loan loss coverage may seem low at 73%, management clarified these were heavily backed by collateral. Moreover, 30% of its GIL are R&R accounts, which can be reclassified to performing after 6 months of observation. Based on stress conditions, Alliance sees the doubling of current GIL ratio may also lead to net credit cost (NCC) swelling as much as 2x. For FY20, NCC is likely to be higher vs their guidance of 40-45bp (ex-bond impairment) given more depressed macro variable used in their expected credit loss model.

To incur MFRS9 related losses? Management shared there may be some MFRS9- related modification day 1 loss on fixed rate loans (particularly hire purchase books) in 1QFY21 due to the 6-mth moratorium. However, Alliance is looking for dispensation from BNM. Otherwise, the estimated potential impact to interest income is 3-4%. That said, we are not too worried considering there will be accrued interest from floating loans (like mortgage) to act as cushion. Besides, there is no underlying effect to total debt collection on a cash basis.

No liquidity crunch. Despite a low cash pile of RM1.3b (as at 31 Dec) and needing c.RM1.0-1.5b of cash to sustain 3-6 mths of operations, management did not appear overly concerned given its strong liquidity coverage ratio of 163% (industry: 148%); c.70% of its RM11b investment securities are MGS. In addition, Alliance is committed to maintain dividends at historical payout level (48%), believing it has the capacity to do so.

Other key updates. Preliminary assessment by Alliance indicated FY21 loans growth may taper to 3% (from 5% currently) with industry slowing to 2% (from 4%). On OPR, management expects only another 25bp cut while we have already built in a higher 50bp reduction in our financial model. As for non-interest income, Alliance shared that growth has waned due to lower transaction fees, rebate for MEPS ATM services, and subdued wealth management business. However, the impact will be mitigated slightly by treasury income as we note the bank is sitting on c.RM250m of unrealized gains.

Forecast. We cut our FY20-22 net profit forecasts by 2-5% to reflect slower loans growth (to 3% from 4%), softer NOII contribution (-7%), and higher loan loss provision (+3-4%).

Keep BUY but with a lower GGM-TP of RM2.35 (from RM2.50), following our profit cut and based on 0.59x CY20 P/B (from 0.63x) with assumptions of 7.1% ROE (from 7.4%), 9.9% COE, and 3.0% LTG. This is beneath its 5-year average of 1.05x and the sector’s 0.79x. The discount is fair given its falling ROE trend (2-3ppt 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 materially below global financial crisis level of 0.89x). Besides, it is offering attractive cash dividend yield of 6-7%.

Source: Hong Leong Investment Bank Research - 21 Apr 2020