Review

• Alliance Bank (ABMB) reported a 1HFY24 net profit of RM335.9mn, declining 9.4% YoY from RM370.6mn last year due to higher operating expenses and net credit cost. Despite that, ABMB’s results came within expectations, with the profit at 47% and 50% of ours and consensus fullyear forecast.

• A first interim dividend of 10.85 sen per share (1HFY23: 12.0 sen per share) has been declared. This represents a payout of c. 50%.

• Combined with Islamic net financing income, total net interest income (NII) climbed 2.2% YoY due to higher loan volume and better asset yields due to the OPR hike. Despite that, the net interest margins (NIM) were compressed by 16bps YTD to 2.48% (FY23: 2.64%) due to the higher cost of funds.

• Loan growth accelerated at a stronger pace of 10% YoY (FY23: +6.2% YoY) to RM51.5bn. The yearly improvement was led by the SME segment (+15.0% YoY), which received a boost from term loans and Commercial Banking (+12.2% YoY). Meanwhile, Consumer Banking loans remained in a positive growth trajectory (+8.8% YoY), supported by Personal Financing (+21.3% YoY) and Mortgages (+5.3% YoY). Total deposits rose 4.4% YoY, underpinned by FDs (+18.4% YoY). CASA deposits declined by 4.1% YoY. The CASA ratio stood at 44.2%, remaining one of the highest among banking peers.

• Including Islamic Financing, non-interest income (non-NII) grew by 20.0% YoY as higher Wealth Management (+11.8% YoY) from stronger banca fees, FX sales and trade fees (+14.9% YoY) and Banking services fees (+60.7% YoY) drove higher client based fee income. Treasury and investment income also improved on the back of revaluation gain on strategic equity investments.

• Net credit cost climbed to RM74.4mn in 1HFY24 vs RM57.0mn a year ago as the normalisation of ECL BAU was offset by the reversal of ECL overlays. The annualised net credit cost stood at 29.6 bps, slightly below management’s FY24 guidance of 30-35 bps. Meanwhile, ABMB’s gross impaired loans ratio improved sequentially to 2.51% from 2.63% in 1QFY24. Still, it deteriorated from 1.87% a year ago due to increases in the GIL ratios for the SME (+60 bps YoY), Commercial & Corporate (+100 bps YoY) and Consumer segments (+50 bps YoY). The loan loss coverage ratio was at 120% (1HFY23: 133.8%).

• Elsewhere, total overhead expenses increased by 13.9% YoY mainly attributed to higher personnel expenses from collective agreement salary adjustments and higher headcount. ABMB also reported higher IT expenses related to strategic initiatives and marketing expenses for the Consumer business and branding refresh. On the back of negative JAWs, ABMB’s 1HFY24 cost-to-income ratio climbed to 48% (1HFY23: 43.9%) – within the guidance of <48%.

• Lastly, the group’s CET1 Capital Ratio and total capital ratio stood above regulatory requirements at 12.9% and 17.5%, respectively. Meanwhile, ABMB also reported a healthy liquidity position as the liquidity coverage ratio stood at 154.3%.

Impact

• We 1) raised our net credit cost assumption to 37/34/29 bps, and 2) lowered the growth assumption for Islamic Banking operations to align with the 6M results performance. With that, we reduced ABMB’s FY24/25/26 net profit to RM673/713/772mn from RM717/766/831mn.

Outlook

• The loan growth momentum accelerated in 2Q, pushing loan growth, which was falling behind in 1Q, closer to management’s 8-10% target. Elsewhere, all other indicators, such as NIM, credit cost, cost-to-income ratio and ROE, are currently running within expectations. To recap, management had revised these targets in the previous quarter due to 1) the intense deposit competition, resulting in NIM guidance lowered to 2.45% - 2.50% (from 2.50% - 2.55%), 2) the CTI ratio of <48% and 3) rising macro headwinds, resulting in a higher net credit cost assumption 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 roll the valuation base year for ABMB to FY25. As such, we maintain ABMB’s TP at RM3.80 despite the downward revision to our earnings estimates. Our valuation is based on an implied PBV of c. 0.86x based on the Gordon Growth Model. Buy reiterated on ABMB.

Source: TA Research - 1 Dec 2023