Investment Highlight

• We maintain our BUY recommendation on Alliance Bank Malaysia (ABMB) with unchanged fair value (FV) of RM4.60/share based on FY24F ROE of 11.3% implying a P/BV of 1.0x.

• We make no changes to our earnings estimate and our neutral 3-star ESG rating.

• Recall that the group recorded a loan growth of 4.6% YoY in 4QFY22. In line with the recent improvement in industry loan growth to 5.6% YoY in June 2022, we expect ABMB to register a stronger loan growth momentum in 1QFY23 driven by an expansion of SME and commercial loans. Meanwhile, mortgage loan growth is likely to improve slightly vs. -1.8% YoY in 4QFY22 supported by pipeline deals

• As of late July 2022, loans under financial assistance totalled RM6.5bil, a modest increase from RM6.3bil (13.6% of total loans) in the 4QFY22 results briefing update on 31 May 2022.

• Looking at June 2022 BNM statistics, the industry GIL ratio inched up to 1.7% from 1.5% in March 2022. We believe that the uptick was contributed by the gradual expiry and tapering of repayment reliefs moving towards a targeted financial assistance for loan borrowers.

• We expect an uptick in ABMB’s GIL ratio in 1QFY23 from 1.8% in 4QFY22. 1QFY23 is likely to see a marginal increase in delinquencies for retail loans due to the recent festive season as well as SME loans. However, delinquencies for commercial and corporate loans are expected to remain stable.

• 1QFY23 NIM is anticipated to expand, driven by the OPR hike of 25bps in May 2022 as well as due to stronger loans momentum. On a full-year basis, every 25bp hike in OPR will lift the group’s NIM by 4bps or RM20mil in interest income.

• In 4QFY22, ABMB reported a CASA ratio of 48.9%. We expect the ratio to be sustained in 1QFY23 with growth of deposits from SavePlus likely to be subdued in the quarter.

• Cumulatively, the group’s pre-emptive provisioning of RM450mil (close to 100bps) has yet to be consumed. This, in addition to the regulatory reserves of RM48mil, remains a buffer that will provide comfort in allocating provisions to specific loan accounts if necessary without significantly increasing the impairment of loan allowance for potential credit losses.

• 1QFY23 is likely to see some reversal in management overlays. We expect substantial reversals of overlays to only occur in 2023 after visibility on its loan portfolio’s asset quality has improved.

• On ESG, the group has raised its target to grow new sustainable business to RM10bil by FY25 from RM5bil earlier. Thus far, until 1QFY23, the group has already achieved RM3.3bil. It is on track to attain its greenhouse gas emission (GHG) targets.

• We gather that business loans in the watch list category (C5) for sustainability have been reduced to 53%, well ahead of its end-FY23F timeline to lower to <60%. The majority of the group’s business loans lie in the C3 (transitioning) and C4 (watch list) category. Business loans in the C4 & C5 categories are mainly loans granted to the manufacturing sector. The group is focused on providing financing and non-financing support to assist SMEs and business owners to adopt sustainable practices. ABMB has partnered with Malaysia Green Technology and Climate Change Corporation (MGTC) and Bursa Malaysia to provide various sustainable propositions to business owners.

• The stock’s foreign shareholdings have been steady at 21% as of end June 2022 (Mar 2022: 21.5%)

• The group’s 1QFY23 results are scheduled to be released on 30 Aug. We expect the 1QFY23 earnings to be strong, supported by a faster pace of loan growth, NIM expansion coupled with some reversals of management overlays which could see its net credit cost coming in better than the guided 40–45bps for FY23F.

Source: AmInvest Research - 9 Aug 2022