Alliance’s 1QFY23 profit doubled QoQ given positive Jaws, bad loan provision writebacks, and lower effective tax rate. Also, NIM widened sequentially, loans growth held steady, and asset quality was resilient. Overall, results were ahead of expectations, and thus, we raise FY23-25 estimates by 3-4%. We continue to like the stock as it offers cash dividend yield of 6-7%. Moreover, it has one of the highest management provision overlay buffer as a % of gross loans and is a prime beneficiary of OPR increase. Maintain BUY but with a higher GGM-TP of RM4.05 (from RM3.85), based on 0.93x FY23.

Above expectations. Alliance printed 1QFY23 net profit of RM212m (doubled QoQ, +45% YoY). This was ahead of expectations, forming 32% of our and consensus full year forecasts; key variance came from loan loss provision writebacks.

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

QoQ. The doubling in net profit was thanks to positive Jaws (total income +5% while opex -4%), impaired loan allowance writebacks, and lower effective tax rate (-11ppt). At the top, net interest margin (NIM) expanded 7bp but was offset slightly by the 4% decline in non-interest income (NOII); this was dragged by weaker fees and treasury performance.

YoY. Earnings grew 45% on the back of bad loan provision writebacks. However, this was capped by soft top-line (-2%) as NOII (-25%) was hit by sluggish fees and weak investment-related income. Moreover, the 9% jump in opex (due to higher personnel, establishment, marketing, and admin costs) limits profit from growing faster.

Other key trends. Loans and deposits growth held steady at +6.7% YoY (from a low 1QFY22 base; 4QFY22: +4.6%) and +4.0% YoY (4QFY22: -0.6% YoY) respectively. However, sequential loan-to-deposits ratio (LDR) saw a downtick of 1ppt to 95%. For asset quality, gross impaired loans (GIL) ratio remained flattish QoQ at 1.84%.

Outlook. Following Jul-22’s OPR hike, NIM is seen to continue expand sequentially. However, the magnitude may be capped by potentially fiercer rivalry for deposits. That said, loans growth is expected to chug along for now, considering economic recovery is strong. Separately, GIL ratio is likely to rise but we are not overly concerned, since Alliance has already made heavy pre-emptive provisioning in FY21-22 to cushion this impact. Moreover, FY23-24 NCC assumptions built in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY21-22’s level).

Forecast. Following the earnings beat, we raise FY23-25 estimates by 3-4% to reflect lower loan loss provision.

Retain BUY but with a higher GGM-TP of RM4.05 (from RM3.85), after raising our profit forecast. The TP is based on 0.93x FY23 P/B (from 0.88x) with the assumptions of 10.3% ROE (from 10%), 10.9% COE, and 3.0% LTG. This is largely in line to its 5- year and sector average of 0.81-0.92x; we believe the valuation is fair given that its ROE output is similar to pre-pandemic level and industry mean. In our opinion, there is still some leg for share price to run. The stock offers attractive cash dividend yield of 6-7%. Also, it has one of the highest management provision overlay buffer as a % of gross loans and is a prime beneficiary of OPR increase.

Source: Hong Leong Investment Bank Research - 1 Sept 2022