Management’s tone remains guarded when we spoke recently. We will not be entirely surprised with an upward NCC revision. Growth drivers were still fairly mixed with NIM recovery intact but loans growth is likely to stay tepid. Also, they are not looking to aggressively realize their FVOCI reserve. Overall, we cut our FY21 profit forecast by 7% but left FY22-23 estimates unchanged. The risk reward profile continues to be balance. Hence, maintain HOLD but with a lower GGM-TP of RM2.90 (from RM3.00), based on 0.69x CY21 P/B.

We spoke to management for some operational updates. In general, the tone was still guarded but a recovery in FY22 remains likely due to impending Covid-19 vaccination rollout and supportive BNM policies to help trouble borrowers.

Higher NCC? In 1HFY21, loans under repayment assistance was at RM5bn, making up 12% of total gross loans; similar to peers, this is expected to rise, consistent with the 15-20% guidance we have been gathering from other banks. Separately, FY21 net credit cost (NCC) was earlier guided at c.100bp but we will not be surprised with an upward revision, seeing that some peers have recently indicated such a move to ramp up pre-emptive provisioning efforts; currently, our FY21 NCC estimate is 84bp.

Mixed growth drivers. Net interest margin (NIM) stays on the path of recovery and is projected to end between 2.30-2.35% in FY21 (slipping by 5-10bp vs our forecast of - 14bp). As for loans growth, odds are it remains tepid at c.1% (trailing earlier target of >2% and our 2% estimate), given that system lending has tapered. Besides, Alliance does not have intention to aggressively realize its RM358m fair value through other comprehensive income (FVOCI) reserve as they prefer to hold on to higher yielding assets. That said, our FY21 non-interest income (NOII) forecast of RM300m seems too conservative, especially when stacked against 1HFY21 figure of RM212m.

Other key updates. Management will remain strict with cost control to deliver positive Jaws in FY21; we note cost-to-income ratio (CIR) has improved to 42% in 1HFY21 vs FY20’s 48%. While Alliance has the intention to divvy during its final reporting quarter, we understand it would still largely hinge on the visibility on Covid-19 impact, which is still rather uncertain for now. That said, we believe they have the capacity to distribute dividends and hence, pencilled in a FY21 payout ratio of 22%, similar to FY20’s level but below its historical run-rate of >40%.

ESG initiatives. Like peers, Alliance has offered flood relief assistance to customers living in flood-affected areas, which include repayment relief of up to 6 months and fee waivers. Also, we note the bank has been a member of FTSE4Good Bursa Malaysia Index since 2013 with a current ESG rating of 3 stars (out of 4 max).

Forecast. After reflecting higher NCC and reviewing our NIM and NOII assumptions, we cut FY21 earnings by 7% but left FY22-23 estimates unchanged as our projections appear reasonable for now (these are already 8% below consensus).

Maintain HOLD but with a lower GGM-TP of RM2.90 (from RM3.00), following our profit cut and based on 0.69x CY21 P/B (from 0.71x) with assumptions of 6.2% ROE (from 6.3%), 7.7% COE, and 3.0% LTG. This is below its 5-year average of 0.95x and the sector’s 0.85x. The discount is fair given its falling ROE trend (2-3ppt lower vs 5- year and sector mean). While trading at an attractive price point, we view it as a riskier investment proposition among smaller-sized banks, given less resilient asset quality. We will turn more bullish only when share price trends closer to the RM2.30-2.35 level as it will then provide a higher margin of safety.

Source: Hong Leong Investment Bank Research - 26 Jan 2021