Spoke to management recently and guidance for FY22 were largely unchanged. Concerns on higher-than-expected NCC were assuaged by the huge provision overlays amassed in FY21. Separately, income growth drivers were still largely mixed with NIM recovery intact but loans growth is likely to remain tepid. Also, handsome treasury-related gains would not be easily attainable. Overall, we cut FY22-23 bottom-line by 1-2% and introduced FY24 estimates. Although trading at an attractive price point (P/B at -1.5SD), we still consider Alliance as a riskier investment proposition among smaller-sized banks, given less resilient asset quality. Maintain HOLD but lowered GGM-TP to RM2.60 (from RM2.80), based on 0.62x FY22 P/B.

We spoke to management recently for some operational updates. Overall, the earlier guidance for FY22 were largely intact, save for loans growth target, which we reckon could be at risk.

Built in conservative NCC. Alliance’s outstanding loans under repayment assistance (RA) continued to make up 16% of its loans book. However, this will likely increase, since a prolonged MCO may spawn more troubled borrowers. We calculated it could land somewhere around 20-25% (just a tad higher vs its peak estimate of 20% earlier during the year), assuming all customers vulnerable to Covid-19 adversities will seek help, coupled with those moderately impacted in 4QFY21 remaining unchanged. Also, we understand the RM313m management overlay provision made in FY21 (or 71bp NCC) have adequately accounted for staging and default event on the supposed peak 20% RA loans. Therefore, the FY22 net credit cost (NCC) guidance of <90bp is not in danger of an upward revision; we have prudently imputed 84bp into our model.

Mixed top-line growth drivers. The 5bp widening in FY22 net interest margin (NIM) guidance is intact vs our conservative forecast of +2bp. As for loans growth, odds are it remains lacklustre at c.1-2% (trailing Alliance and our target of +3-4%), amid Covid19 woes. Separately, client-based fee income will continue to be supported by wealth management & brokerage businesses. However, we reckon handsome treasury gains would not be easily attainable vs last year since the fixed income market has become choppier. Therefore, to err on the side of caution, we still project a lower non-interest income (NOII) run-rate of RM360m vs RM420m in FY21.

Other key updates. Modification loss damage from the new 6-month loan moratorium is not anticipated to be as significant as the 1st automatic loan deferment, considering financing charges on flat rate products are unlikely to be waived; thus, it could come in narrower at RM20-30m (FY21: RM68m). Besides, quarterly opex is seen to normalize down to RM190-200m level after booking in one-off items like project-related and professional fee costs in 4QFY21. Lastly on dividends, we believe it is reasonable to expect payout to stay at 20-25% level in FY22 given Covid-19 headwinds and will only revert back to >40% when business activities return to normal.

Forecast. After reducing our loans growth assumption, we cut FY22-23 bottom-line by 1-2%. Also, we introduced FY24 estimates.

Maintain HOLD but lowered GGM-TP to RM2.60 (from RM2.80), following our profit cut. The TP is based on 0.62x FY22 P/B (from 0.67x) with assumptions of 6.6% ROE, 8.8% COE (from 8.4% to reflect the lack of interest and appetite for small sized banks during times of uncertainty), and 3.0% LTG. This is below its 5-year average of 0.89x and the sector’s 0.88x. The discount is fair given its falling ROE trend (1-2ppt 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 - 28 Jul 2021