Review

• Alliance Bank (ABMB) reported an encouraging set of 1QFY25 results. 1QFY25 net profit increased by 17.3% YoY to RM176.7mn, anchored by higher operating income. ABMB’s results came within expectations, with the YTD net profit at 24% of ours and the consensus forecast.

• Combined with Islamic net financing income, total net interest income (NII) jumped 15.8% YoY due to higher loan volume and a more stable net interest margin (NIM) trend. YTD NIM slipped by 3 bps to 2.45%, compared to the 16 bps YoY decline in FY24. Sequentially, NIM was steady compared to 4QFY24 NIM of 2.45%.

• Loan growth accelerated at a more robust pace of 14.8% YoY (FY24: +13.6% YoY) to RM57.1bn, exceeding management’s target of 8-10% for FY25. The yearly improvement was led by Commercial Banking (+17.5% YoY), followed by the SME segment (+17.1% YoY) due to strong demand for term loans and Corporates (+9.7% YoY). Consumer banking loans remained on a growth trajectory (+14.0% YoY), supported by personal financing (+20.6% YoY) and mortgages (+10.4% YoY). Total deposits rose 11.6% YoY, underpinned by FDs (+14.9% YoY). Meanwhile, CASA deposits, which rebounded in the 3QFY24, grew at a decent 5.5% YoY. While ABMB’s CASA ratio has narrowed marginally to 41.5%, it remains one of the highest among banking peers.

• Including Islamic Financing, non-interest income (non-NII) grew by 15.7% YoY, thanks to higher client base fee income where, Wealth Management broadened at a stronger pace of 36.4% YoY, followed by FX sales and trade fees (+13.2% YoY). Banking services fees declined by 7.1% YoY. Meanwhile, non-NII also received a boost from higher treasury and investment income (+2.8% YoY) due to higher AFS gains.

• Net credit cost climbed to RM45.8mn in 1QFY25 vs RM34.7mn a year ago due to the absence of overlays writeback. The annualised net credit cost stood at 32.4 bps, coming in within management’s FY25 guidance of 30-35 bps. Meanwhile, ABMB’s gross impaired loans ratio saw a slight uptick to 2.17% from 2.11% in 4QFY24. Compared to a year ago, the GIL ratio improved by 46 bps due to improvements in the Commercial & Corporate (-50 bps YoY) and the Consumer segment (-70 bps YoY). There was, however, a slight 10 bps increase in the GIL ratio for SMEs. Elsewhere, the loan loss coverage ratio was at 111.6% (FY24: 113.8%).

• Elsewhere, total overhead expenses increased by 12.7% YoY, mainly attributed to higher personnel expenses from increased 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 positive JAWs, ABMB’s 1QFY25 cost-to-income ratio improved to 48.0% (1QFY24: 49.3%) – within the guidance of keeping the CTI ratio at around 48%.

• Lastly, the group’s CET1 Capital Ratio and total capital ratio stood above regulatory requirements at 12.2% and 16.4%, respectively. Meanwhile, ABMB also reported a healthy liquidity position as the liquidity coverage and net stable funding ratios stood at 163.0% and 112.9%, respectively.

Impact

• No change to our earnings estimates.

Outlook

• ABMB continues to exhibit robust growth across its various business segments, with management's guidance remaining on track across key indicators. While maintaining a cautiously optimistic outlook for the year, management has reaffirmed its FY25 targets. Specifically, loan growth is expected to range between 8-10%, driven by solid momentum across core segments. However, heightened competition may pressure NIM to a lower range of 2.40-2.45%, down from 2.48% in FY24.

• Management remains vigilant regarding asset quality within the SME portfolio, acknowledging that ongoing inflationary pressures could pose challenges for borrowers in this segment. Consequently, the net credit cost is projected to increase to 30-35 bps, up from 25.8 bps in FY24. Despite these challenges, management is confident in maintaining an ROE above 10% (FY24: 10.2%), supported by ongoing efforts to keep the CTI ratio around 48% (FY24: 48.2%).

• Additionally, the ACCELER8 2027 strategy appears to be progressing well, with all pillars expected to meet FY25 targets. This includes strong customer acquisition momentum, evidenced by the addition of 29,000 new-to-bank (NTB) consumer customers and 2,500 NTB SME customers in 1Q, deepening relationships as seen in the 16% YoY increase in nonNII, and healthy Islamic financing growth of 13% YoY within its Islamic franchise.

Valuation

• We updated the beta and lowered our market risk premium from 6% to 5.5% for the banking sector on the back of the improving economic environment in Malaysia, the banking system’s healthy asset quality and capital ratios, stable interest rate environment and more positive investor sentiments. With that, we raise ABMB’s TP from RM4.30 to RM5.00. Our valuation is based on an implied PBV of c. 1.08x based on the Gordon Growth Model. Given that the risk-reward potential has widened, we upgraded ABMB from hold to BUY.

Source: TA Research - 30 Aug 2024