Alliance Bank’s (Alliance) FY20 earnings declined 21% yoy to RM424.2m, as management stepped up pre-emptive provisioning in 4QFY20 and was impacted by higher delinquency rates during the quarter (when MCO commenced). Meanwhile, we were relieved to see that FY20’s fund-based income was flat yoy despite the OPR cut, as the group benefited from continuous growth of higher-yielding loans and lower funding cost. Overall, the results were within expectations. We remain cautious on the banking sector, largely due to a subdued economic outlook in 2020-21. We maintain our SELL rating on the stock, with our 12-month PT unchanged at RM2.18. No dividends were proposed in 4QFY20.

Pre-provision Profits Negated by Higher Impaired Loan Allowances

Alliance saw a weaker 4QFY20 net profit (-12.3% yoy and -26.8% qoq), but full year net profit of RM424.4m (-21.1% yoy), came in within our and street’s estimates. The favourable pre-provision profits (PPOP) of RM882.3m in FY20 (+4% yoy) was offset by higher allowances for expected credit losses (ECL) (+109% yoy; net credit cost at 72.1bps vs. 31.5bps in FY19), which was driven by: i) a large account impairment of RM59.6m; ii) additional macroeconomic variables overlay of RM22m; iii) personal financing delinquency of RM12.3m; iv) ECL model review of RM10.8m.

NIM Compression of 10bps, Within Management’s Guidance

At the fund-based income line, Alliance saw NIM compression of 10bps yoy to 2.4% for FY20, as the impact of the 50bps OPR cut and delinquency pricing revisions were mitigated by overall expansion of: i) higher risk-adjusted returns loans (driven by the Alliance One Account, personal financing and SME loans) and lower funding cost in 4QFY20. Its gross loans grew by 2.2% yoy in FY20 while CASA ratio also improved to 37.4% vs. 35.5% in FY19.

Reiterate SELL; PT Maintained at RM2.18

We keep our SELL rating and Price Target of RM2.18 (based on a 0.53x P/BV target on the CY21E BVPS) unchanged, pending further guidance from management. Our FY21E-23E assumptions: NIM at ~2.35%, credit cost at 62- 63bps, CIR at 50-51%. We remain cautious of ABM’s asset quality due to a subdued economic outlook and a potential rise in unemployment rate in the country (our forecast at 8% for 2020). Upside risks – credit recoveries and asset quality improvement.

Source: Affin Hwang Research - 26 Jun 2020