In FY22, Alliance achieved all its topline sustainability goals. Thus, we continue to like its sustainability initiatives and we reckon that it will make further strides in posting better grade in our next ESG banking review . For FY23, management focus is to (i) rollout SME sustainability solutions, (ii) scale up ESG engagement with customers, along with (iii) enhance ESG risk mitigation, management, and reporting. As for operational side of things, we sensed potential upside gain to FY23 NIM and NCC guidance. However, we opt to keep forecasts since reporting season is around the corner. Introduce FY25 financial estimates. Seeing recent pullback in share price, we find it is a good chance to accumulate on weakness. Upgrade to BUY but retain GGM-TP at RM3.85, based on 0.88x FY23 P/B.

Yesterday, Alliance conducted its Sustainability Webinar where management gave an update on their ESG initiatives. Thus, in this report, we summarize the key-takeaways and also, penned down some operational updates we obtained recently.

Achievements. We gathered Alliance has outperformed its FY22 sustainable banking business target of RM0.5bn, where it accumulated RM2.1bn in total (making up 4.5% of gross loans). As such, they up the ante and increased their FY25 target to RM10bn from the earlier RM5bn. So far, in 1QFY23, it has amassed RM3.3bn. Besides, it has brought down its C5 watchlist category business loans to 53% (FY23 target: <60%). Separately, we note that a bulk of the remaining portfolio are C3 (transitioning) and C4 (watchlist) classification. Essentially, C4 and C5 mainly comes from the manufacturing sector while C3 is from wholesale and retail segments. Lastly, Alliance claims that it is on track to meet its greenhouse gas (GHG) emission target (will announce its KPI in the next couple of months).

FY23 ESG focus. Management is aiming to: (i) rollout SME sustainability solutions via low carbon transition facility (solar financing program) and debt capital market offering (sustainable and green bonds), (ii) scale up ESG engagement with customers through thought leadership events and various advocacy programs (team up with Malaysian Green Tech, Bursa, United Nations Global Compact), coupled with (iii) enhance ESG risk mitigation, management, and reporting (GHG reduction actions, embedding ESG into its social supply chain).

Operational updates. Also, we spoke to Alliance recently to obtain some operational updates. Overall, there was a positive undertone and we sensed potential upside gain to FY23’s NIM (broadly stable) and NCC guidance (40-45bp). Key takeaways include: (i) further drop in outstanding repayment assistance (RA) rate, given more PEMULIH graduation, (ii) scope for writebacks, considering that it has high pre-emptive provision built up of 100bp vs sector average of 55bp, (iii) every 25bp rise in OPR is expected to widen NIM by 3bp on an annualized basis (only baked one rate hike in guidance), and (iv) elevated CASA ratio of 49% to see some slippage (pre-covid stood at 37%).

Forecast. Unchanged since reporting season is just around the corner. That said, we introduce FY25 financial estimates.

Upgrade to BUY but keep our GGM-TP at RM3.85, based on 0.88x FY23 P/B with assumptions of 10.0% ROE, 10.9% COE, and 3.0% LTG. This is largely in line to its 5-year and sector average of 0.81-0.90x; we believe the valuation is fair given that its ROE output is similar to pre-pandemic level and industry mean. Overall, we continue to like Alliance’s sustainability initiatives and we reckon that it will make further strides in posting better grades in our next ESG banking review. Moreover, seeing the recent pullback in share price performance, we find it is a good opportunity to accumulate the stock on weakness. In our opinion, the risk-reward profile has turned more favourable now and it offers cash dividend yield of 6-7%.

Source: Hong Leong Investment Bank Research - 22 Jul 2022