Alliance’s 3QFY21 core net profit fell 23% YoY on the back of higher allowance for bad loans. Also, GIL ratio deteriorated and loans growth lost further traction. However, NIM widened sequentially. Overall, results beat expectations and thus, we raise FY21-23 profit by 3-15% to reflect stronger NOII. Even though trading at an attractive price point (P/B at -1.5SD), we view Alliance as a riskier investment proposition among smaller-sized banks, given less resilient asset quality. Keep HOLD with unchanged GGM-TP of from RM2.90, based on 0.68x CY21 P/B.

Beat expectations. Stripping modification loss/gains in (3Q/2QFY21), Alliance posted 3QFY21 core net profit of RM104m (+4% QoQ, -22% YoY), bringing 9MFY21 sum to RM308m (-6% YoY). This exceeded our expectations, accounting for 93% of full-year forecast but was largely within consensus at 79%; key variance was from better-than expected non-interest income (NOII).

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

QoQ. The 4% rise in core net profit was thanks to positive Jaws as total income grew 2% ppt faster than opex; net interest margin (NIM) widened 3bp to 2.26% while NOII ticked up 2% on better investment showing (+15%). Also, loan loss provision was flat.

YoY. Core bottom-line decreased 22% on the back of higher allowance for bad loans (+4-fold). This was cushioned by stronger NOII (+59%) as investment-related income tripled while opex declined 9% on lower personnel (-6%) and admin costs (-33%).

YTD. Similar to YoY showing, core earnings fell 6% given the 2-fold spike in provision for impaired loans. Again, it was mitigated by investment-related income which tripled and lower opex (-6%).

Other key trends. Both loans and deposits growth lost further traction to -0.8% (2Q FY21: +1.2%) and -1.2% YoY (2QFY21: +5.7%) respectively. In turn, loan-to-deposit ratio (LDR) nudged up 4ppt sequentially to 94%. As for asset quality, gross impaired loans (GIL) ratio rose 77bp QoQ to 2.52% due to uptick in consumer banking.

Outlook. We see NIM pressure returning (but will be short-lived) given budding 25bp OPR cut in 1H21. On the other hand, loans growth is anticipated to stay tepid for now as Covid-19 related headwinds drag near-term showing but should gain back traction 6-12 months down the road. Even though GIL ratio has creeped upwards, we are not overly worried as Alliance has been making heavy pre-emptive allowances throughout FY21 and we reckon credit risk has been adequately priced in by the market, looking at the high FY22 NCC assumption used by us and consensus (above the normalized run-rate but below FY21’s level). Moreover, we believe the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Forecast. With the better-than-expected 3QFY21 results, we raise FY21-23 profit by 3-15% to reflect stronger NOII.

Maintain HOLD with unchanged GGM-TP of from RM2.90, despite raising net profit forecasts. This is based on 0.68x CY21 P/B (from 0.69x) with assumptions of 6.6% ROE (from 6.2%), 8.2% COE (from 7.7% to impute higher risk premium, after seeing a large surge in GIL ratio; this was not very apparent among peers so far), and 3.0% LTG. The P/B multiple below its 5-year average of 0.94x and the sector’s 0.90x. 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 (P/B at -1.5SD), we view Alliance as a riskier investment proposition among smaller-sized banks, given less resilient asset quality.

Source: Hong Leong Investment Bank Research - 8 Mar 2021