INVESTMENT HIGHLIGHTS

• Focus after the corporate reorganization is scaling up on its two products; (i) Alliance One Account (AOA), (ii) Alliance at Work

• Strong support to SMEs but also selective to reduce risk

• Less focus on conventional mortgage but AOA will moderate impact

• Less significant impact from FRS 9

• Possible green shoots from its transformation

• Maintain BUY with an unchanged TP of RM4.60, pegging its FY18 BVPS to PB multiple of 1.3x

Key take away. We met with the Group recently for a visit to gather recent development following the completion of its corporate reorganization. Below are the key take away from our meeting:

• Focus now is scaling up on its two value proposition; (i) Alliance One Account (AOA), and (ii) Alliance at Work.

• Strong support to SMEs but concurrently being very selective.

• Recalibrating its loans book to better risk adjusted return (RAR) loans and selective on other loans type e.g. mortgages.

• No significant impact coming from FRS 9 implementation.

Reorganization completed, now to focus on scaling up. After the completion of its corporate reorganization, the Group stated that the focus will be on scaling up its two main products going forward, namely AOA and Alliance at Work. While the Group had begun introducing the products concurrently with the corporate reorganization, we believe that following the latter’s completion; the Group will be in a better position to succeed in its plans.

Good traction for AOA. We like its AOA as we believe that it brings to the market an in-demand product. Although, loans consolidation by retail borrowers is not new, we opine AOA offer potential borrowers a well-crafted package. We understand the take up rate have been very encouraging. Based on management’s 1QFY18 update, sales were more than RM300m as at July’17, while the incremental revenue from this was RM0.3m which was faster than the management expected.

AOA has the potential to be revenue accretive. Furthermore, we note that the yield for AOA is better. This stems from how it is packaged. AOA consolidate a borrower’s mortgage, personal loans, auto loans and credit card into one account. The mortgage portion of the loan is fixed while the remaining is flexible more akin to an overdraft facility but with lower rates. While the Group will be able to charge higher rates than a conventional mortgage, the amalgamated loan will also result in lower rates for the borrowers. Hence, in our opinion the attractiveness of the AOA. We believe that this will curtail any pressure on NIM and possibly improve it. Recall, NIM improved by +10bps yoy to 2.32% in 1QFY18.

Scaling up Alliance at Work will be another focus. The Alliance at Work account is the bundling of product for all of the Group’s business customers but we believe caters more to SMEs. Besides offering facilities such as cash management to SMEs, it also offer “cash to home” solution which is aimed at foreign workers of SMEs. These workers will be able to open a bank account, which is previously very difficult for this group, and remit money to their home country using digital application such as a mobile app. We believe the value proposition is two-fold; (i) ease for foreign workers, and more importantly, (ii) steady supply of CASA for the Group. It will also appeal for the companies in terms of avoiding physical cash transaction for its payroll. Besides being a cheap source of funding, the Group will also be able to earn fee income for the service.

Nurturing to SME brings future reward. We gather that the Group have a strong presence amongst SMEs despite the competitive space. This could possibly due to its strategy of nurturing and supporting SMEs during its early years. This includes having “learning centre” for SMEs. It has a strong presence in the Klang Valley, Sabah, Sarawak and Johor. As the SMEs grow, the Group will be able to offer more product and services, for example starting with cash management and then to offering working capital loans, terms loans and property financing. This means that the Group will be able to develop customer loyalty amongst the SMEs. Furthermore, the loans for SMEs are also better yielding when compared to corporates. Another advantage is the system and infrastructure the Group has in place, and its program lending which allows for faster credit decisions.

Selective in SME to reduce risk. We believe the its focus on SMEs may open it to asset quality risk. However, our concerns are placated by the fact that the Group are also selective in its exposure to SMEs. Not just on selecting quality SMEs as customers, but also on the sectors of the SMEs. Amongst the sectors that the Group does not concentrate on are SMEs from the oil & gas, commodity and mix & commercial property developers.

Recalibrating its loans book especially conventional mortgages. As a result of the traction AOA, we understand that the Group are deliberately slowing down the growth of its conventional mortgages. Indeed, mortgages and business premise loans fell -3.4%yoy to RM20.4b as at 1QFY18. We opine that the potential of AOA and growth from SME loans will be able to moderate the impact of the loans book recalibration. Also, we understand that the AOA is expected not to cannibalize on its mortgage segment. As such, we believe that the Group will be able to achieve its target of mid-single digit loans growth in FY18, which is in line with our loans growth projection.

Investment needed for transformation. The management indicated that investment will be needed to ensure the success of the new focus. As such, it had guided RM90m additional cost for the transformation, which includes the hiring of sales personnel. We expect that this will increase its CI ratio in FY18 to around 50-51% level for FY18. Nevertheless, we note that some of these increased costs are one-off expenses, and should normalise in FY19. We opine that while the increased costs are temporary, the benefits it brings will be long term. Revenue accretion will be among them. Hence, it is partly our reason for expecting a +9.8%yoy in total income in FY18.

So far, no significant impact to FRS 9. We understand that the effect of Day One of FRS 9 implementation will be minimal given that the Group has the regulatory reserve to offset the impact. Similarly, impact to credit cost will not be as severe as initially expected. The Group is also buffering up its capital further with its Tier 1 Capital program, which we believe will strengthen its capital position post FRS 9. In addition, the Group is already compliant to Net Stable Funding Ratio (NSFR) requirement given its NSFR above 100%. We were pleased that the Group will not be participating in any undue deposit competition that may stem from NSFR requirement in CY19.

FORECAST

We are maintaining our FY18 and FY19 forecast as we have taken into account the effect from its new products during the previous result review.

VALUATION AND RECOMMENDATION

In our opinion, the Group has an investment proposition which based on the traction of its products. We also believe that its size brings certain advantage such as ability to institute a transformation program and nimbleness. We were pleased by the traction seen from its Alliance One Account. Overall, we believe that the Group has a bright prospect in FY18 and going into FY19. Therefore, we are maintaining our BUY call. We maintain our TP at RM4.60 which is based on pegging its FY18 BVPS to PB multiple of 1.3x which is its 5-year historical average PBV.

Source: MIDF Research - 27 Oct 2017