As anticipated, management sounded downbeat during the post-results briefing last Friday: (i) NIM is seen to fall 18bp, excluding the impact of another potential 25bp in 2H20 coupled with day 1 modification loss, (ii) NCC to possibly come as high as 100bp in FY21 on the back of GIL ratio rising by 1.5ppt, and (iii) timeline for dividend resumption could not be established. However, Alliance’s liquidity position remained robust given high levels of LCR and NSFR. No changes were made to our forecasts. Overall, its risk-reward profile remains balanced as there are no compelling re-rating catalysts, despite undemanding valuations. Retain HOLD and GGM-TP of RM2.20, based on 0.52x CY21 P/B.

Management held a post-results briefing last Friday. Discussions revolved around its 4QFY20’s performance and outlook for FY21.

NIM under pressure. The 100bp OPR cut in 1H20 is seen to drag net interest margin (NIM) by 18bp. Management expects another 25bp OPR reduction in Jul-20, which should further remove 4-5bp from NIM. Besides, the MFRS9 day 1 modification loss is estimated to have a net impact of c.RM25m and could shave NIM by 4bp. However, these negatives can be slightly cushioned by treasury-related income, considering the bank is sitting on c.RM330m of unrealized AFS gains (as at May-20) vs a total income base of RM1.6b (c.20%).

Covid-19 woes. Alliance has identified <5% of its loans are significantly impacted by Covid-19 (e.g. tourism, restaurants, hotels, non-essential retail trade). Furthermore, it has no lending to the Aviation industry and only has a mere 0.1% exposure to the O&G sector. Management is broadly guiding FY21 net credit cost (NCC) to be <100bp, after posting 72bp in FY20 (where 8bp is attributed to early Covid-19 impact); this is based on the expectation that gross impaired loans (GIL) ratio increase to 3.5% from 2.0% currently.

Robust liquidity position. The expected rise in undrawn commitments and collection shortfall for the loan deferment is c.RM280m/mth. However, this is not worrisome since it works out to be only c.54% of its outstanding cash balances. We understand 82% of eligible individual and SME customers have opted to stay in for the 6-mth loan auto moratorium while 20% of its corporate and commercial clients are on similar arrangement. Also, Alliance has a healthy liquidity coverage (LCR) and net stable funding ratio (NSFR) of 157% and >100% respectively.

No dividend visibility. Management did not provide much input on FY21 dividends after shrinking its payout ratio to 22% in FY20 due to the ongoing Covid-19 crisis (the run rate from FY17-19 was 48%). For now, capital conservation is key and, in our opinion, Alliance is likely to abandon dividends again in 2QFY21 as uncertainties continue to linger; we think dividend resumption will reasonably occur only in 4QFY21 and payout should be close to the 22% level.

Forecast. Unchanged as there were no material positive updates from the briefing.

Keep HOLD and GGM-TP of RM2.20, based on 0.52x CY21 P/B with assumptions of 6.3% ROE, 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). All in all, its risk-reward profile remains balanced, since there are no compelling catalysts to re-rate the stock, despite undemanding valuations.

Source: Hong Leong Investment Bank Research - 6 Jul 2020