• 1QFY21 net profit came in at RM104.3m (+36% yoy; +6.4% qoq), while the underlying net profit was not much different at RM103.4m. Results were within Affin’s and market expectations.
• As the quarters ahead remain uncertain, we maintain our earnings forecasts for FY21E-23E. There are potential downside risks to earnings from: i) continual proactive provisions; and ii) additional rate cuts (25bps to 50bps).
• We maintain our FY21E-23E earnings forecasts. Upgrade to HOLD (on valuation grounds) with our 12-month PT of RM2.18 unchanged.

1QFY21 Operating Results Held Up Well

Alliance’s underlying 1QFY21 net profit (excluding a mod-loss impact of RM64.4m and fair value gain of RM65.7m from disbursement of loans under the SRF and CGC) stood at RM103.4m, relatively neutral compared to its reported net profit of RM104.3m (+36.4% yoy and +6.4% qoq). Operating income grew by 30% yoy (though it declined 2.9% qoq), as results were boosted by robust treasury and investment gains while fundbased income fell 1.4% yoy and 3.9% qoq. Other takeaways include: i) NIM declined 16bps yoy and 25bps qoq to 2.21%.; ii) loan growth remained subdued, and was flat ytd; iii) 1QFY21 CIR was lower at 44.3% vs. 48.7% in 1QFY20; and iv) annualized net credit cost (NCC) was at 21.8bps vs. 1QFY20 (24.6bps) and 4QFY20’s 22.7bps.

What to Expect Ahead? Downside Risks to Earnings Remain Down the Road

Downside risks to Alliance’s earnings remain, from: i) continual proactive provisions, as delinquencies may rise for borrowers in the vulnerable sectors, after the loan moratorium period ends by Sept20. Nonetheless, management will assess every R&R account on a case-to-case basis, on whether or not it will trigger a significant increase in credit risk (from Stage 1 to Stage 2). Management has identified vulnerable loan accounts of potentially RM3bn (7% of loanbook) that are under close scrutiny; ii) additional rate cuts; every 25bps rate cut could shave 4-5bps from Alliance’s FY21E NIM (net profit impact at -RM18m) while a permanent impact will be ~1.5bps on NIM.

Upgrade to HOLD, Price Target Unchanged at RM2.18

We upgrade our rating on Alliance from Sell to HOLD (on valuation grounds), with our PT unchanged at RM2.18 (based on a 0.54x P/BV on CY21E BVPS) underpinned by a CY21E ROE of 6.4% and cost of equity of 9.4%. We believe that the uncertainties over Alliance’s earnings in FY21 have been priced in. On the other hand, we do not see many share-price catalysts (in-line with industry peers). Our underlying assumptions for FY21E: loan growth at -1% yoy, NIM at 2.3%, net credit cost at 62bps, CIR 51%. Downside/upside risks: interest rate cuts/hikes; higher/lower NCC.

Source: Affin Hwang Research - 28 Aug 2020