Alliance’s 2QFY21 Core Net Profit Fell 3% QoQ Due to Rise in Loan Loss Provision. Also, Loans Growth Tapered Slightly. However, Sequential NIM Widened and GIL Ratio Nudged Down During the Quarter. Overall, Results Were Broadly in Line and Hence, Our Forecasts Were Unchanged. Despite Undemanding Valuations, Asset Quality Woes Mainly Stemming Its Alliance One Account Is Still Worrisome (has Halted Temporarily Due to Non-staging During Moratorium Period But May Return in Upcoming Quarters). Maintain HOLD But With Higher GGM-TP of RM2.60 (from RM2.20), Based on 0.61x CY21 P/B.

Largely in line. Excluding net modification gains (in 1Q & 2QFY21), Alliance posted 2QFY21 core net profit of RM100m (-3% QoQ, -13% YoY), bringing 6MFY21 sum to RM203m (+6% YoY). This was broadly within estimates, accounting for 52-57% of our and consensus full-year forecasts; we see pre-emptive provisions being ramped up.

Dividend. None declared (vs 2QFY20: 6sen) because management decided to take a wait and see approach, before divvying in 4Q of its financial year.

QoQ. The 3% decrease in core net profit was owing to the jump in loan loss provision (+58%). That said, total income rose 12%, thanks mainly to better non-interest income (NOII, +49%); this was backed by robust fees (+34%) and investment-related income (+26%). Also, net interest margin (NIM) widened 2bp to 2.23%.

YoY. Core bottom-line fell 13% on the back of higher allowance for bad loans (+95%). This was despite a 33% rise in NOII as investment -related income doubled during the quarter. We note that opex also declined 3% given lower personnel cost (-6%).

YTD. Without the lumpy impairment on financial assets (booked RM49m in 1QFY20), core net profit increased by 6%.

Other key trends. Both loans and deposits growth tapered slightly to 1.2% (1QFY21: +1.7%) and 5.7% YoY (1QFY21: +7.9%) respectively. However, loan-to-deposit ratio (LDR) nudged up 1ppt sequentially to 90%. As for asset quality, gross impaired loans (GIL) ratio fell 14bp QoQ to 1.75% due to the effect of loan moratorium.

Outlook. We see subsiding NIM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NIM recovery. That said, loans growth is seen to stay tepid for now as Covid-19 related headwinds drag near-term showing but should pick up pace 6-12 months down the road. Separately, we expect GIL ratio to stay at low levels in 1H21, since troubled borrowers can obtain targeted assistance from Alliance; however, it may hide actual damage and lead to a lag in NPL formation if the situation does not improve swiftly. As such, Alliance is likely to step up their preemptive provisioning in the short-haul but it will drop and normalize progressively.

Forecast. Unchanged as 2QFY21 Results Were Largely Within Estimates.

Retain HOLD but with a higher GGM-TP of RM2.60 (from RM2.20), based on 0.61x CY21 P/B (from 0.52x) with assumptions of 6.3% ROE, 8.5% COE (from 9.5% to reflect risk-on mode and sector rotation into recovery stocks), and 3.0% LTG. This is beneath its 5-year average of 0.96x and the sector’s 0.86x. The discount is fair given its falling ROE trend (2-4ppt lower vs 5-year and sector mean). While we appreciate the effort to differentiate (since it is a small bank), asset quality woes mainly stemming from its Alliance One Account product is still worrisome (this has halted temporarily due to non-staging during moratorium period but may return in subsequent quarters).

Source: Hong Leong Investment Bank Research - 30 Nov 2020