Alliance’s 1QFY21 core net profit rose 5% QoQ due to positive Jaws and lower loan loss provision. Also, loans growth and asset quality held steady during the quarter. However, sequentially NIM contracted. Overall, results were broadly in line and hence, no change to our forecasts. Despite undemanding valuations, asset quality woes from its Alliance One Account is still worrisome (has halted temporarily but may return after the moratorium period as staging in provision buckets can take place again). Maintain HOLD and GGM-TP of RM2.20, based on 0.52x CY21 P/B.

Largely within estimates. Excluding net modification gains, Alliance posted 1QFY21 core earnings of RM103m (+5% QoQ, +34% YoY). This was broadly within estimates, making up 26-29% of our and consensus full-year forecasts; we see provision for bad loans creeping up, especially after the automatic moratorium period.

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

QoQ. The 5% increase in core net profit was owing to positive Jaws (from lower opex, -9% via strict cost control) and fall in loan loss provision (-3%). That said, total income fell 3% due 25bp slippage in net interest margin (NIM) and non-interest income (NOII) declined 3%; this was due to weaker fees and forex losses.

YoY. Core bottom-line jumped 34% on the back of stronger NOII (+30%), which came from investment-related income (+4-fold). This was despite a 71% rise in allowance for bad loans as there were no lumpy impairment on financial investments during the quarter.

Other key trends. Both loans and deposits growth stayed steady at 1.7% (4QFY20: +2.2%) and 7.9% YoY (4QFY20: +7.6%) respectively. However, loan -to-deposit ratio (LDR) was down 2ppt sequentially to 89%. As for asset quality, gross impaired loans (GIL) ratio fell 11bp QoQ to 1.89% due to the effect of loan moratorium.

Outlook. With potentially another OPR reduction (-25bp) in 2H20, we believe this will continue to exert pressure on NIM. Also, loans growth is anticipated to remain tepid as Covid-19 related headwinds drag performance. Separately, we see GIL ratio to stay at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from Alliance; however, this may mask actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve expeditiously or an advent of Covid-19 second wave paralyses the country again.

Forecast. Unchanged as 1QFY21 results were largely within estimates.

Retain 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 1.00x and the sector’s 0.78x. The discount is fair given its falling ROE trend (2-4ppt lower vs 5-year and sector mean). Despite undemanding valuations, we find that there are no compelling catalysts to re-rate the stock. Also, asset quality woes primarily stemming from its Alliance One Account is still very worrisome (this has halted temporarily due to non-staging during moratorium period but may return in subsequent quarters).

Source: Hong Leong Investment Bank Research - 28 Aug 2020