This article first appeared in The Edge Malaysia Weekly on April 15, 2019 - April 21, 2019

BIG is not always better in banking. Joel Kornreich, CEO of Alliance Bank Malaysia Bhd, the smallest of eight local lenders, strongly believes that an unwavering focus on what the bank is good at — small and medium enterprise (SME) and consumer banking — will continue to help it hold its own in the highly competitive industry.

“I don’t really have a strong opinion on whether [being] small is fantastic or not. There are certainly some advantages — as a team, we can respond to any issues that crop up very quickly — but our real strength lies in the fact that we have been very focused on a few key areas and, as we continue to execute initiatives, that is proving to be effective,” he tells The Edge in an interview.

This, he says, has helped put Alliance Bank on a stronger footing in the industry, size notwithstanding.

For perspective, with RM54.3 billion in assets as at end-2018, Alliance Bank is only a fifth the size of RHB Bank Bhd, the fourth largest lender, and about 7% of Malayan Banking Bhd, the largest.

However, it enjoys one of the highest margins and returns on equity (ROEs) in the industry. Its ROE stood at 10.3% for the first nine months of the fiscal year ending March 31, 2019 (9MFY2019). Net interest margin (NIM) was an enviable 2.48% compared with the industry average of about 2.2%.

Over the 1½-hour-long interview, Kornreich talks candidly of how, having proven its mettle, Alliance Bank now wants to accelerate its growth in SME and consumer banking over the next three financial years. He explains that, to have wider access to customers, the bank will forge partnerships with large corporates — but he does not divulge details — and that wealth management will be a new area of focus for the group.

Kornreich is clear about the bank’s endgame. “Our ambition has always been expressed in terms of returns. So, we’re hoping in three years’ time to have an ROE of close to 12%. That would be over RM700 million of net profit after tax,” he reveals.

Apart from that, the bank also wants to have the highest net promoter score — a measure of customer experience — in the SME space, the bedrock of its business. “We want to be perceived as the best in terms of being fast, simple, responsive and aligned with our clients’ needs. I think, if we have that, our future continues to be good.”

To reach those goals, its capital expenditure (capex) is expected to go up in the next three years as it pursues more digital initiatives. Capex for FY2019 was slightly under RM80 million compared with RM73 million in FY2018.

Where it stands

Alliance Bank reported a solid 12% year-on-year rise in net profit to RM425.8 million in 9MFY2019, which was within analysts’ expectations. The growth was commendable considering that its loan loss provisions increased 63% to RM90.9 million in the absence of a one-off writeback from credit rating scale alignment for corporates in the previous period.

The strong growth in profit was supported by a 12 basis points (bps) expansion in NIM, thanks to the bank’s increased focus on high risk-adjusted-return (RAR) loans — which include Alliance One Account (AOA), personal and SME loans — that provide better yields.

AOA is a unique product that lets borrowers consolidate all their loans into one account for convenience and lower overall borrowing costs.

The bank’s proportion of high RAR loans increased to 41% of total loans, from 35% in December 2017. Kornreich believes it can go up to 60% over the next three years.

Despite the higher risk profile, the bank’s asset quality has remained sturdy. Its gross impaired loan (GIL) ratio, at 1.28% was a 15bps improvement over the nine months and the third-best in the industry. Kornreich expects it to remain stable in FY2020, at “around 1.3% to 1.4%”.

“The [increasing shift to higher RAR] loans may mean slightly higher credit costs going forward, but it’s worth it because the margins more than make up for that,” he says. “We guided for credit costs to be below 35bps in FY2019, and I think we’ll be there. We don’t think this will change very significantly in FY2020.”

He says the bank is on track to achieving its targets for the full financial year. “We guided for about 10% ROE and a 10% improvement in net profit, as well as a cost-to-income ratio (CIR) of below 50%. There’s no reason to change the guidance [as] we’re definitely on track,” he says. CIR stood at 46.9% as at end-2018.

For the next three years, Alliance Bank expects to continue its net profit growth trajectory of “high single digits to low double digits”. Loan growth should be around 7% in FY2020, says Kornreich.

“Even though the economy has moderated somewhat, we think it’s a pretty shallow slowdown and [growth] should come back, so we’re reasonably optimistic about the longer term. We see huge opportunities and they are focused on one thing — to be the most important relationship for the financial success of business owners. That has been our strategy for the last two to three years, and it will remain so. It is resulting in us introducing quite a few innovations, especially in the SME space, as we look to do things quicker, better and aligned with what the clients want,” he says.

Recent innovations include Alliance@Work, a product mainly for company payroll accounts and accounts for corporate employees. As at 9MFY2019, there were more than 18,600 new local employee accounts opened under Alliance@Work. It also acquired more than 860 new company payroll accounts.

Growing SMEs faster

The bank’s loan growth, at 6% for the first nine months, was higher than the industry average of 5.6%, but nevertheless tracking behind the bank’s guidance of 10% for the full year.

SME loans alone grew 12% y-o-y in the nine-month period, in contrast to stagnant growth in the industry.

“We think we’ll get SME loan growth of around 10% for the full year. In the last three years, we’ve had a compound annual growth rate (CAGR) of 9.8% compared with the industry’s 5.1%. But now, given the new initiatives we have put in place, we’re aiming to accelerate growth. In the next three years, we think SME loans will grow at a CAGR of 13%, while consumer loans, in aggregate, will grow about 9%,” he elaborates.

Its SME clients are spread over various industries and fall in a revenue band that ranges from “a couple million ringgit” to RM50 million.

“We’re actually trying to expand our programme lending to a broader range of SMEs. Right now, the semi-automated programme lending goes up to RM10 million, and we want to take it up to RM20 million,” says Kornreich.

He is not overly worried about asset quality worsening in the SME space amid the slower economy. The bank has tightened its credit underwriting standards and has strong relationships with clients, enabling it to identify potential problems early, he says. Its SME GIL ratio has remained stable at 2.1% in the last two quarters.

Analysts, however, are more guarded and expect Alliance Bank’s GIL ratio, like for most banks, to deteriorate slightly in FY2020 as the economy slows.

On consumer banking, Kornreich says that the bank is “revamping” its wealth management set-up. “We recently launched a wealth academy to enhance the knowledge of our relationship managers. And we’re reconfiguring our branches so that we’ll have a broader range of people to help customers. There’ll be specialists around insurance and investments, for example. That, combined with the fact that we have an open platform when it comes to products, will help us be more competitive in the consumer space,” he says.

Kornreich reveals that the bank is in the process of hiring a new head of consumer banking. He hopes to have someone in place by the third quarter. The previous head, Suparman Kusuma, recently left the group.

Base rate

Kornreich shoots down market speculation that the bank will raise its base rate soon. “There is no immediate plan to raise the base rate.”

Asked whether he expects Bank Negara Malaysia to cut the overnight policy rate (OPR) at its next monetary policy meeting on May 7, Kornreich responds: “Actually, we’re not sure. Up until a short time ago, I think most people were very sure that there would be no cut. Now, it’s less clear.”

Alliance Bank has the highest proportion of floating rate loans among the local banks, at 89.9%. Hence, any cut in the OPR would likely affect it the most. “If there was a cut in OPR, yes, it would affect the bank. But we’ve been through cuts and hikes before ... it’s part of life,” says Kornreich matter-of-factly.

He is nevertheless confident that the bank will be able to maintain its margins. “I guess you could say there are three reasons. One, is the continued shift to high RAR loans, two is the quite-successful campaign, SavePlus [a high-yield current account product] ... a very high percentage of balances there is fresh money or new-to-bank. And three, is our continued efforts in Alliance@Work,” he says.

Kornreich is tight-lipped when asked if mergers and acquisitions are part of the group’s three-year plan. The bank is often viewed as an M&A target given its size.

“As management, we don’t comment on inorganic growth ... it’s always up to the shareholders. The only thing that I’ll say is that we are 100%-focused on the business that we’re conducting to optimise and maximise the returns,” he says.

Alliance Bank is backed by Singapore’s state-owed investment firm Temasek Holdings. Temasek’s interest in the bank is held through Duxton Investments Pte Ltd, which holds 49% of Vertical Theme Sdn Bhd, which in turn controls 29.06% of Alliance Bank.

The Employees Provident Fund has a 12.15% stake in the lender.

Kornreich has been at the helm for just over four years now. He got into the driving seat in January 2015. The Belgian, who is in his early 50s, has over 26 years of banking experience, the bulk of which was with US banking giant Citigroup.

When asked about his leadership tenure, Kornreich reveals that his contract comes to an end at the end of the year. “So, we’ll see [about renewal] later this year. If all the stars are aligned, then it’ll get renewed!” he says with a laugh.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.