Held a meeting with management recently and gathered the bank is on track to meet earlier FY23 guidance: (i) 35-40bp NCC, (ii) broadly stable NIM, and (iii) 6- 8% loans growth. Moreover, there is no asset quality issue at its SME segment and Alliance has not seen any knock-on impact to the retail business from the recent OPR hikes up to Jul-22. However, the corporate & commercial banking segment faced some company specific weakness within the conglomerate and construction sectors (nothing alarming). Overall, forecasts were unchanged and we continue to like the stock as it offers attractive cash dividend yield of 6-7%. On top of that, it has one of the highest management provision overlay buffer as a % of gross loans. Retain BUY and GGM-TP of RM4.05, based on 0.93x FY23.

We spoke to management recently for some operational updates. Overall, the earlier guidance for FY23 were largely intact.

Stepping up on provisions. Thanks to the SME segment, about 50% of its observed loans under repayment assistance (RA) have graduated after 6 months of surveillance (RM500m of Jun-22’s RM1.1bn). However, the pace of decline for total outstanding loans under RA has slowed down (making up 6-7% of its loans book vs Jun-22: 8%) as there are currently lesser dropouts from the longer-term payment relief assistance (PRA) bucket. That said, Alliance kept its FY23 net credit cost (NCC) guidance at 35- 40bp (in line with our estimates at 35bp), which implies an annualized 55bp NCC run rate for the remaining of its reporting year (2Q-4QFY23 vs 1QFY23: -15bp); we can expect provision top-ups for the corporate & commercial banking segment along with macroeconomic variable (MEV) adjustments going forward.

Steady franchise revenue. The broadly stable net interest margin (NIM) expectation for FY23 was retained vs our forecast of +2bp; management see gains from overnight policy rate (OPR) hikes to be neutralized by: (i) price competition for fixed deposits, (ii) current and savings account (CASA) being run down, coupled with (iii) expiry of using Malaysian Government Securities (MGS) to meet the Statutory Reserve Requirement (SRR) compliance at year end. That said, NIM is projected to expand 4-5bp for every 25bp rise in OPR. Similarly for loans growth, management maintained its FY23 target of +6-8% (ahead of our +3% estimates), supported by both the SME and commercial banking businesses.

Other key updates. So far, there is no asset quality issue at its SME segment. As for retail, Alliance has not seen any knock-on impact from the recent OPR increase up to Jul-22. That said, the corporate & commercial banking segment faced some company specific weakness from the conglomerate and construction sectors (nothing alarming). Separately, we understand that Alliance did some hedging to blunt the impact of big market movement swings on its treasury income. Moreover, FY23 opex was guided to climb 3-4% (in line with our +4% expectations).

Forecast. Unchanged despite our tepid loans growth projection, considering that the sensitivity to earnings is minute (every 1% incremental rise in lending growth could lift Alliance’s net profit by only a mere 0.6%).

Retain BUY and GGM-TP of RM4.05, based on 0.93x FY23 P/B with assumptions of 10.3% ROE, 10.9% COE, and 3.0% LTG. This is largely in line to its 5-year and sector average of 0.81-0.88x; we believe the valuation is warranted given that its ROE output is similar to pre-pandemic level and industry mean. In our view, there is still some leg for share price to run. The stock offers attractive cash dividend yield of 6 -7% and also, it has one of the highest management provision overlay buffer as a % of gross loans.

Source: Hong Leong Investment Bank Research - 13 Oct 2022