Alliance’s 4QFY20 core net profit fell 19% YoY due to higher bad loan provision. Also, loans growth decelerated and asset quality deteriorated further. However, sequential NIM improved. Overall, results were largely within estimates but with weaker management guidance, we lower FY21-22 earnings by 3-16%. Despite undemanding valuations, asset quality woes at its Alliance One Account is now turning more worrisome. In addition, dividends were scaled back. Retain HOLD but with a lower GGM-TP of RM2.20 (from RM2.50), based on 0.52x CY21 P/B.

Largely in line. Stripping away the one-off goodwill impairment for its stockbroking business (in 4QFY19), Alliance posted 4QFY20 core earnings of RM98m (-27% QoQ, -19% YoY) and in turn, brought FY20 adjusted net profit to RM424m (-22% YoY). This was broadly within estimates, accounting for 96-98% of our and consensus full-year forecasts.

Dividend. Surprisingly, none declared as Alliance is prioritising capital conservation.

QoQ. The 27% fall in core earnings was mainly owing to higher loan loss allowances (doubled). If not for this, pre-provision profit was up 7% on the back of positive Jaws from better non-interest income (NOII; +8% due to forex gains) and wider net interest margin (NIM; +7bp); besides, opex was down 3%.

YoY. Similarly, core bottom-line dipped 19% as provision for bad loans doubled. Also, positive Jaws from quicker total income growth of 7% vs opex, helped to cushion the decline; NOII jumped 56% given higher commission income and forex gains.

YTD. The RM49m impairment on financial assets in 1QFY20 and higher impaired loan provision (doubled) dragged core net profit down by 22%. Total revenue grew 5%.

Other key trends. Loans growth lost momentum to 2.2% YoY (3QFY20: +5.2%) while deposits decelerated to 7.6% YoY (3QFY20: +9.5%); this resulted in loan-to-deposit ratio (LDR) falling 3ppt sequentially to 90%. As for asset quality, gross impaired loans (GIL) ratio rose 14bp QoQ due to mortgage and personal financing segments.

Outlook. NIM pressure is seen to reappear in following quarters given May-20’s 50bp OPR cut and possibly another 25bp reduction in 2H20. Also, with the confluence of events from Covid-19 crisis and imminent recession, loans growth is anticipated to remain sluggish. Besides, asset quality is poised to weaken further but it should not spiral out of control (at least till end Sep-20); this is because Malaysian borrowers were granted 6-mth loans deferment while any restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired.

Forecast. Although 4QFY20 results were broadly within expectations, management is guiding for weaker FY21. Hence, we cut FY21-22 profit by 3-16% to factor in higher NIM slippage and net credit cost assumptions. Also, we introduce FY23 estimates.

Maintain HOLD but with a lower GGM-TP of RM2.20 (from RM2.50), following our profit cut and roll valuations to CY21. The TP is based on 0.52x P/B (from 0.64x) with assumptions of 6.3% ROE (from 7.1%), 9.5% COE, and 3.0% LTG. This is beneath its 5-year average of 1.01x and the sector’s 0.79x. The discount is fair given its falling ROE trend (2-4ppt lower vs 5-year & sector mean). Despite undemanding valuations, asset quality woes particularly stemming from its Alliance One Account is now turning more worrisome. In addition, dividends were scaled back

Source: Hong Leong Investment Bank Research - 2 Jul 2020