Alliance’s 1QFY22 bottom-line tripled QoQ on the back of positive Jaws, lower loan loss allowances, and effective tax rate. Also, NIM widened sequentially and GIL ratio remained flat. However, loans growth lost momentum. Overall, results beat estimates and hence, we bump up FY22-24 profit by 8-9%. While trading at an attractive price point (at -1SD), we still view Alliance as a riskier investment proposition among smaller-sized banks, given less resilient asset quality. Keep HOLD but raised GGM-TP to RM2.80 (from 2.60), based on 0.66x FY22 P/B.

Beat estimates. Alliance posted 1QFY22 net profit of RM146m (+3-fold QoQ, +41% YoY on a core basis, after stripping away net modification gains in 1Q/4QFY21). This was above expectations, making up 33-35% of our and consensus full-year forecasts; key variances came from stronger-than-expected total income & softer-than-expected opex.

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

QoQ. The 3-fold increase in net profit was thanks to: (i) positive Jaws as total income rose 10% while opex fell 17%, (ii) loan loss provision declined 30%, and (iii) effective tax rate normalized downwards. At the top, non-interest income (NOII) expanded 27% primarily on the back of stronger investment-related performance (doubled). Also, net interest margin (NIM) widened 9bp. As for the drop in opex, it was broad base across all cost items.

YoY. Positive Jaws from quicker total income growth vs opex (+11ppt) helped to lift bottom-line by 41%; this was again led by better NOII, which rose 20% (due to robust fee income and forex gains) along with NIM expansion (+29bp). Separately, impaired loan allowances came in flattish and contributed to the overall faster earnings growth as well.

Other key trends. Both loans & deposits growth lost momentum at -0.5% (4QFY21: +1.1%) & -4.7% YoY (4QFY21: +0.1%) respectively. As a result, loan-to-deposit ratio (LDR) nudged up 1ppt QoQ to 92%. For asset quality, gross impaired loans (GIL) ratio was unchanged at 2.34%.

Outlook. We expect NIM to remain stable premised on no OPR reduction (since it is already at an all-time low) and limited scope for further CASA expansion. Separately, loans growth is seen to stay tepid for now as Covid-19 related headwinds drag near term showing. 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, seeing the high FY22 NCC assumption employed by us & consensus (above the normalized run-rate but below FY21’s level). Moreover, we believe the Government & BNM will continue to be supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. Since 1QFY22 results beat expectations, we raise FY22-24 earnings by 8- 9% to account for stronger NIM, NOII, and softer opex.

Retain HOLD but raised GGM-TP to RM2.80 (from 2.60), following our profit uplift. The TP is based on 0.66x FY22 P/B with assumptions of 7.2% ROE, 9.3% COE, and 3.0% LTG. This is beneath its 5-year and sector average of 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 -1.0SD), we view Alliance as a riskier investment pick among smaller-sized banks, given its less resilient asset quality.

Source: Hong Leong Investment Bank Research - 30 Aug 2021