This article first appeared in The Edge Financial Daily on July 16, 2019

Alliance Bank Malaysia Bhd
(July 15, RM3.74)
Maintain buy with an unchanged target price of RM4.80: We believe Alliance Bank Malaysia Bhd still makes a difference against its peers amid a more cautious market through key products, such as the Alliance ONE Account (AOA), small and medium enterprise (SME) banking and Alliance@Work, and in an enhanced digital ecosystem. In terms of operations, though the financial year ending March 31, 2020 (FY20) net interest margins (NIMs) may shrink between five and 10 basis points (bps) year-on-year (y-o-y), we believe downside risks are mitigated by a stronger loan growth through its new marketing initiatives.

Its credit cost — 35bps in FY20 — and cost-to-income ratios are expected to remain steady notwithstanding a cautious market outlook and the need to beef up technology and upscale its staff force. The small Alliance Bank has been focusing on boosting higher risk-adjusted return (RAR) loans — +27% y-o-y in FY19, while reducing its exposure to lower RAR loans (-5.8% y-o-y). The strategy has worked well, as reflected in the AOA’s robust growth of 220% y-o-y and the SME and commercial loan book of 12.7% y-o-y in FY19.

The robust growth of the higher RAR loans resulted in Alliance Bank’s NIM expansion in the last four years, from 2.15% in FY16 to 2.5% in FY19. Alliance Bank continues to differentiate in its growth and marketing strategies, for instance launching the “Alliance Mortgage Partner-in-Sales” programme, where loan approvals of the AOA rose 36% y-o-y to RM3.33 billion, and its disbursement up 102% y-o-y.

SME and commercial loans — comprising 27% of Alliance Bank’s loan book as at FY19 — grew 12.7% y-o-y, partially driven by the Alliance Origination System’s launch in July 2018. Accordingly, 95% of new SME loans are processed via this system, allowing for a faster disbursement of the loans — in less than five days.

We believe though the NIM may see a pullback to 2.45% to 2.48% in FY20 to FY22 versus 2.5% in FY19, due to the overnight policy rate cut’s impact, Alliance Bank’s loan growth is expected to outperform the industry’s growth, at 6.5% in FY20. Downside risks are NIM compression and a higher credit loss. — Affin Hwang Capital, July 15