Alliance’s 4QFY21 core net profit fell 57% QoQ on the back of negative Jaws as NOII came in weak. However, NIM broadened sequentially, loans growth gained traction, and GIL ratio ticked down. Regardless, results still missed estimates & thus, we cut FY22-23 profit by 1-3%. Although trading at an attractive price point (P/B at -1.5SD), we still view Alliance as a riskier investment proposition among smaller-sized banks, given less resilient asset quality. Keep HOLD but lowered GGM-TP to RM2.80 (from RM2.90), based on 0.67x FY22 P/B.

Below estimates. Stripping modification gains/loss in (4Q/3QFY21), Alliance chalked in 4QFY21 core net profit of RM45m (-57% QoQ, -54% YoY), bringing FY21 total to RM352m (-17% YoY). This was below expectations, forming 92-93% of both our and consensus full-year estimates; key variances came from softer-than-expected non interest income (NOII) and higher-than-expected loan loss provision.

Dividend. Final DPS of 5.8sen was declared (vs 4QFY20: nil; FY21: 5.8sen vs FY20: 6.0sen) Ex-date: 16 June 2021.

QoQ. The 57% drop in core net profit was no to thanks negative Jaws as total income fell 9% while opex jumped 21%; NOII declined 38% given poor investment showing (- 75%), along with increasing personnel (+15%) and admin costs (doubled). However, these drags were mitigated by higher net interest margin (NIM; +15bp) and lower bad loans provision (-9%).

YoY. Core bottom-line decreased 54% on the back of negative Jaws (opex grew 12% ppt faster than total income) and higher allowance for impaired loans (+39%).

YTD. Core earnings declined 17% due to the doubling in provision for bad loans. This was cushioned by investment-related income, which tripled along with flattish opex.

Other key trends. Both loans & deposits growth gained traction by +1.1% (3QFY21: - 0.8%) & +0.1% YoY (3QFY21: -1.2%) respectively. In turn, loan-to-deposit ratio (LDR) nudged down 3ppt sequentially to 91%. For asset quality, gross impaired loans (GIL) ratio fell 18bp QoQ to 2.34% given downticks across most business segments.

Outlook. We expect NIM to remain stable premised on no OPR reduction (since it is already at an all-time low) and benign deposit competition in 2021. Separately, loans growth is anticipated to stay tepid for now as Covid-19 related headwinds drag near term showing but should gather more pace 6-12 months down the road. Besides, GIL ratio is likely to creep up but we are not overly concerned as Alliance has made heavy pre-emptive provisioning in FY21 & we reckon credit risk has been adequately priced in by the market, looking at the high FY22 NCC assumption used by us & consensus (above the normalized run-rate but below FY21’s level). Furthermore, we believe the Government and BNM will continue to be supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. With the miss in profit, we cut FY22-23 profit by 1-3% to reflect softer NOII.

Keep HOLD but lowered GGM-TP to RM2.80 (from RM2.90), following our profit cut and roll valuations to FY22. The TP is based on 0.67x P/B with assumptions of 6.6% ROE, 8.4% COE, and 3.0% LTG. This is beneath its 5-year average of 0.91x and the sector’s 0.88x. 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 its less resilient asset quality.

Source: Hong Leong Investment Bank Research - 1 Jun 2021