• Maintain BUY, new MYR4.20 TP from MYR4.00, 19% upside with a 6% FY23F (Mar) yield. Alliance Bank Malaysia‘s 1QFY23 net profit of MYR212m outperformed expectations, at 34% and 32% of our and Street FY23 estimates. We are positive on its near-to-medium term prospects, with the loans pipeline looking sturdy and asset quality remaining robust. We lift FY23-25F earnings post results release, with lower credit cost assumptions factored in.

• 1QFY23 numbers beat expectations, making up 34% and 32% of our and Street full-year estimates. Net profit of MYR212m for the quarter surged by 45% YoY (QoQ: >100%) on improved net interest income, as well as a net reversal of impairment allowances amounting to MYR17.3m (1QFY22: -MYR95.3m, 4QFY22: -MYR73.2m). Annualised ROE stood at 13.3% - ahead of management’s FY23F target of >10%.

• Management remains conservative on NIMs, and made no change to its guidance of c.2.5% for FY23. This is despite already achieving 2.57% in 1QFY23, with a potential third policy rate hike to come during the calendar year. Management attributed its cautiousness to increased deposit competition, which would add pressure on funding cost. ABMB currently has an industry-leading CASA ratio of 50%.

• Healthy loans pipeline to drive growth. While loans have largely remained flat YTD, management is keeping its loan growth guidance of 6- 8% for FY23F, citing its strong SME loans pipeline as a key driver. YoY, loans have increased by 6.7%, with strong momentum in the SME (+14% YoY) and non-bank financial institutions (+14% YoY) segments.

• Asset quality still robust. Loan impairment losses for 1QFY23 amounted to MYR41.6m, but these were offset by a reversal of management overlays (MYR41.4m), as well as a recovery from a single account (MYR17.5m). Management alluded to a gradual release of management overlays throughout the next 18 months (end-Jun 2022 balance stood at around MYR408m). For borrowers under repayment assistance (c.8% of loans portfolio), almost 100% have resumed full or partial repayment of their borrowings. In view of this, its guidance for FY23F credit cost has been lowered to 35-40bps (from 40-45bps) – which is still conservative, in our view.

• We increase FY23-25F earnings by 3-4% after lowering our credit cost assumptions. Our TP also rises to MYR4.20 from MYR4.00, based on a fair value P/BV of 0.92x with a 2% ESG premium included, as per our proprietary ESG scoring methodology. This stock is trading at 0.79x 12- month forward P/BV, near 0.5SD above the 5-year mean. We believe the strong momentum can continue, given the banking group’s positive earnings outlook.

Source: RHB Research - 1 Sep 2022