Review

• Alliance Bank (ABMB) reported a 1QFY24 net profit of RM150.5mn, declining 29.0% YoY from RM212.2mn last year due to higher operating expenses and net credit cost. Despite that, ABMB’s results came within expectations, with the profit at 21% and 22% of ours and consensus fullyear forecast.

• Combined with Islamic net financing income, total net interest income (NII) climbed 9.3% YoY due to higher loan volume and better asset yields due to the OPR hike. Despite that, the net interest margins (NIM) compressed by 21 bps YTD to 2.43% (FY23: 2.64%) due to higher cost of funds.

• Loan growth accelerated at a stronger pace of 7.9% YoY (FY23: +6.2% YoY) to RM49.7bn. The yearly improvement was due to the SME segment (+13.4% YoY), which received a boost from term loans and Commercial Banking (+11.7% YoY). Meanwhile, Consumer Banking loans remained in a positive growth trajectory (+7.1% YoY), supported by Personal Financing (+19.9% YoY) and Mortgages (+4.7% YoY). Total deposits rose 6.5% YoY, underpinned by FDs (+25.5% YoY) and other deposits. CASA deposits declined by 6.4% YoY. The CASA ratio stood at 43.9%, remaining one of the highest among banking peers.

• Including Islamic Financing, non-interest income (non-NII) contracted by 17.1% YoY due to lower treasury and investment income, which declined by RM13.6mn, and lower brokerage income, which fell by RM2.8mn YoY. Excluding brokerage, the client-based fee income was little changed YoY at RM78.6mn as higher FX Sales and Trade fees (+RM4.3mn YoY) and Banking Service Fees (+RM3.0mn YoY) helped support lower Wealth Management fee income (-RM9.1mn YoY).

• Net credit cost climbed to 7.1 bps (vs. a net writeback of 3.7 bps in 1QFY23). Management noted that the rise in net credit cost was due to increases in BAU ECL (expected credit losses) from Consumer Banking and Business Banking (incl. SME/Commercial). Despite that, the increase in the credit cost was also muted by a net writeback in management overlays of 9.8 bps from the reversal of pandemic-related overlays and credit overlays. Meanwhile, ABMB’s gross impaired loans ratio rose to 2.63% (FY23: 2.51%), while the loan loss coverage ratio stood at 120% (FY23: 123.7%).

• Elsewhere, total overhead expenses increased by 9.3% YoY, or RM19.5mn, mainly attributed to higher personnel expenses due to higher personnel costs from collective agreement salary adjustments and higher headcount, as well as from IT expenses related to strategic initiatives and marketing expenses for Digital SME and Consumer. On the back of negative JAWs, ABMB’s 1QFY24 cost-to-income ratio climbed to 49.3% (FY23: 45.9%) – above the guidance of <48%.

• Lastly, the group’s CET1 Capital Ratio and total capital ratio stood above regulatory requirements at 13.7% and 18.5%, respectively. Meanwhile, ABMB also reported a healthy liquidity position as the liquidity coverage ratio stood at 163.2%.

Impact

• No change to our earnings estimates.

Outlook

• The 1QFY24 results is currently running slightly below FY24 guidance. Although the loan growth momentum accelerated in 1Q, it is still below the 8-10% target. With NIM contracting to 2.43% due to the higher-thanexpected impact from deposit competition, management took the opportunity here to revise NIM and ROE guidance lower to 2.45% - 2.50% (from 2.50% - 2.55%) and >10% (from 10.5%). Other potential downside risks include higher operating expenses, with CTI guided to be <48% and a more severe-than-expected net credit cost (vs guidance of 30-35 bps).

• Despite that, management remains confident of registering better FY24 earnings on the back of ongoing ACCELER8 2027 strategy – such as 1) expanding on SME, 2) broadening consumer business, 3) growing business banking fee income, 4) strengthening presence in Sarawak and Penang, 5) drive synergies and value creation in the corporate and capital market business and 6) leverage on partnerships to scale product offering, distribution and drive value.

Valuation

• We lowered the sector’s market risk premium assumption to 6.0% from 6.5% on the back of an improved domestic political climate. As such, we raised ABMB’s TP to RM3.80 from RM3.60. Our valuation is based on an implied PBV of c. 0.90x based on the Gordon Growth Model. Buy reiterated on ABMB.

Source: TA Research - 30 Aug 2023