In effort to stage a new leg of growth over the next five years, management has refreshed its business strategies. Overall, we are not exceptionally excited as there could be some pain in the near term when rolling out its game plan. That said, it may pay off in the long haul, if management plays its cards well. All in all, no change to our FY23-25 profit forecasts. In our view, Alliance’s risk-reward profile is balanced, since share price has performed strongly over the past one year and there are no new positive catalysts to drive it much higher. Keep HOLD and GGM-TP of RM4.05, based on 0.93x FY23 P/B.

Yesterday, Alliance unveiled its new 5-year strategic plan called Acceler8 2027, which looks to expand growth beyond SME. In this report, we examine their strategies going forward and whether its FY27 financial aspirations are attainable.

Earlier game plan. To recap, the old plan focused on becoming the preferred bank of business owners. Priorities were to (i) acquire more SME customers and drive market share expansion, (ii) deepen customer engagement in attempt to build dual personal business banking relationship, and (iii) gain efficiencies. In our opinion, Alliance was successful in carrying out its business strategies after looking at its achievements: (i) SME loan market share increased 1.6ppt in FY22 vs FY18, (ii) no. of dual relationship business owners doubled in FY22 vs FY20, (iii) wealth income grew 34% in FY22 vs FY20, (iv) unit processing cost decreased 34% in FY22 vs FY19, and (v) cost-income (CI) ratio fell >5ppt in FY22 vs FY18.

Refreshed strategy. Acceler8’s primary intent is to: (i) replicate its SME success to other customer segments, (ii) build competitive advantages to drive sustainable long term growth (through speed, service, personalization), and (iii) increase value for key stakeholders. That said, Alliance has outlined 4 desired financial outcomes for FY27: (i) top quartile ROE vs peers (>11% vs FY22: 9%), (ii) lending growth above industry (+8-10% vs FY22: +5%), (iii) target c.45% CI ratio (FY22: 44%), (iv) 50% DPR (FY22: 50%). To achieve the above, the bank looks to: (i) continue its SME growth strategy, (ii) support business customers via their life cycle, (iii) broaden the retail business, (iv) target resilient ecosystems, (v) capture share of growth from fast-growing economic corridors (north and east M’sia), (vi) drive synergies of corporate and capital markets business, (vii) accelerate Islamic business, along with (viii) leverage on partnerships.

Some pain in the near-term? While we appreciate the strategies put forth by Alliance over the next 5 years, we are not exceptionally excited. In the near term, CI ratio may climb as the bank has to invest more in order to acquire growth outside of its comfort zone. Also, in pursue of faster loans expansion, Alliance may have to give up margins and its relatively elevated LDR of 95% is not going to help. However, if management plays its cards well, the FY27 11% ROE target is not entirely stretched, in our opinion. From our calculations, if opex grows at a quicker clip of 6.5% p.a. from FY24-27, total income only has to expand 6.0% p.a. (just slightly higher vs the 4.9% revenue CAGR booked from FY17-22) but it must be able to contain NCC at c.25bp (FY23 guidance: 35-40bp; pre-covid normalized 3-year average: 26bp).

Forecast. No changes to FY23-25 profit forecasts.

Retain HOLD 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 above its 5-year average of 0.79x but in line with the sector’s 0.89x. The premium is warranted given its ROE generation is 2ppt higher than its 5-year mean. Overall, we still believe that Alliance’s risk-reward profile is balanced, considering share price has performed strongly over the past one year and there are no new positive catalysts to drive it significantly higher.

Source: Hong Leong Investment Bank Research - 12 Jan 2023