Alliance’s 3QFY23 profit rose 12% QoQ, thanks to lower provision for bad loans. Also, sequential NIM widened and loans growth remained steady. However, GIL ratio climbed upwards during the quarter. Overall, results were largely in line with estimates and thus, forecasts were kept. Although Alliance’s outlook is not exactly the brightest, its recent share price slump provides a more favourable risk-reward profile; valuations are inexpensive and the cash dividend yield of 6- 7% is attractive. Also, it has one of the highest management provision overlays buffer as a % of gross loans. Upgrade to BUY with a higher GGM-TP of RM4.15 (from RM4.05), based on 0.91x CY23 P/B.

Largely within expectations. Alliance printed 3QFY23 net profit of RM177m (+12% QoQ, +17% YoY), bringing 9MFY23 sum to RM548m (+17% YoY). This was largely in line with expectations, forming 80% of our and consensus full-year forecasts.

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

QoQ. The 12% jump in net profit was thanks to lower provision for bad loans (-51%). This was capped by negative Jaws (opex grew 3ppt faster vs total income) and higher effective tax rate (+6ppt). At the top, we saw non-interest income (NOII) falling 12% due to forex losses but was more than offset by net interest margin (NIM) expansion of 5bp and loans growth (+1.1%).

YoY. Despite bad loan allowances doubled and NOII fell 40% (dragged by weak fees and larger forex losses), bottom-line increased 17% on the back of lower effective tax rate (-14ppt).

YTD. Lower impaired loans provision (-35%) and lower effective tax rate (-6ppt) drove up bottom-line by 17%. However, negative Jaws (opex outgrew total income by 4ppt) capped profit from growing faster

Other key trends. Loans and deposits growth remained firm at +6.2% YoY (2QFY23: +6.7%) and +5.5% YoY (2QFY23: +6.0%) respectively. Sequentially, loan-to-deposits ratio (LDR) nudged up 1ppt to 97%. For asset quality, gross impaired loans (GIL) ratio climbed up 6bp QoQ to 1.93%, no thanks to its consumer segment.

Outlook. We expect sequential NIM to shrink given: (i) repricing of matured deposits, (ii) CASA being utilized and substituted to FD, (iii) price competition for FD is still stiff, along with (iv) diminishing flexibility to optimize LDR (already at high levels of c.97%). Also, loans growth is seen to moderate due to a softer domestic macro environment. Besides, GIL ratio is likely to rise but we are not overly worried as we believe Alliance is better equipped vs prior slumps; the large pre-emptive allowances built up in FY21- 22 and 2QFY23 to fight Covid-19 pandemic woes and latency in credit loss from OPR hikes, act as robust buffer to cushion for any short-term asset quality weakness.

Forecast. Unchanged since 3QFY23 results were largely within expectations.

Upgrade to BUY call with a higher GGM-TP of RM4.15 (from RM4.05), as we roll our valuation to CY23 from FY23. The TP is based on 0.91x P/B with assumptions of 10.2% ROE (from 10.3%), 10.9% COE, and 3% LTG. This is above its 5-year average of 0.79x but in line with the sector’s 0.85x. The premium is fair given its ROE output is 2ppt higher vs its 5-year mean. Although Alliance’s outlook is not exactly the brightest, its recent price slump provides a more favourable risk-reward profile. We now find that Alliance’s valuations to be inexpensive and it offers attractive cash dividend yield of 6- 7%. Notably, it also has one of the highest management provision overlays buffer as a % of gross loans.

Source: Hong Leong Investment Bank Research - 1 Mar 2023