• 2QFY21 net profit came in at RM103.9m (-10% yoy; -0.4% qoq), while 1HFY21 net profit of RM208.3m grew 8.3% yoy. Results (on an annualized basis) were within Affin’s estimates and marginally above the street.
• 1HFY21 expected credit loss (ECL) allowance remains elevated (+84.6% yoy) while rising 58.4% qoq as management continued to build-up pre-emptive buffers. 2QFY21 annualized NCC stood at 137.6bps vs. 87.5bps in 1QFY21.
• There were some minor housekeeping adjustments on FY21E-23E earnings. Downgrade to SELL at our 12-month PT of RM2.18. We think investors are better off to take profit on the stock given recent recovery in share price.

2QFY21 net earnings -10% yoy and +0.4% qoq as provisions rose further

Alliance’s 1HFY21 operating income came in at RM896.1m (+7.2% yoy) underpinned by a recovery in 2Q20, as both fund-based income and non-interest income grew 3.7% qoq and 43% qoq. These were largely bolstered by lower funding cost and robust treasury and investment gains. Overall, NIM continued to hold up at 2.23% qoq, while for 1HFY21 was down 15bps yoy to 2.22%. Group loan growth remained subdued, up 1.2% yoy, underpinned mainly by SME loans (+7.4% yoy) and consumer loans (+2.5% yoy).

Building up more provision buffers, in the event of a spike in default cases

We believe that additional buffers are required should there be a spike in default among the lower income (B40) and certain business/SME customers. We are raising our NCC assumptions further from 73bps/63bps/61bps to 100bps/100bps/90bps for FY21E/22E/23E. Based on guidance, about RM5bn or 12% of Alliance’s loanbook is under relief/assistance/R&R programs, Alliance’s ECL allowances of RM816.6m (comprisingStage 1 at RM221.9m and Stage 2 at RM367m; collectively accounts for 72% of outstanding ECL) and regulatory reserves of RM21m appear more than sufficient to buffer against a 1% impairment of its loanbook value, but we think it is prudent for management to raise its LLC further (from current level of 109.6%).

Downgrade to SELL (from HOLD), Price Target unchanged at RM2.18

We downgrade our rating from HOLD to SELL on Alliance, with our PT of RM2.18 unchanged (assumption is based on a 0.52x P/BV on CY21E BVPS, underpinned by a CY21E ROE of 6.3% and cost of equity of 9.4%). We think investors should take-profit given the recent run-up in share price. There were some minor housekeeping adjustments on our earnings forecasts for FY21E/22E/23E as we also raised our net interest income, non-interest income estimates and lowered overheads. FY21E-23E underlying assumptions: loan growth 0%-3% yoy, CIR 43-44%. Downside/upside risks: interest rate cuts/hikes; higher/lower NCC.

Source: Affin Hwang Research - 30 Nov 2020