This article first appeared in The Edge Financial Daily on August 14, 2019
Alliance Bank Malaysia Bhd
(Aug 13, RM3.30)
Maintain buy with a lower target price (TP) of RM4.20: Forecast earnings for the first quarter ending March of financial year 2020 (1QFY20F) are likely weak due to the overnight policy rate (OPR) cut, but we expect sequential improvements as deposits get repriced. Although our earnings forecasts are trimmed, Alliance Bank Malaysia Bhd remains one of our preferred picks, given its niche in the small and medium enterprises (SME) financing and its risk-adjusted returns strategy. Our Gordon Growth Model-derived TP is based on 1.08 times FY20F’s price-to-book value, below its historical mean of 1.3 times.
We expect a weak 1QFY20 for the bank, likely due to deteriorating business sentiments. Notwithstanding, net interest income should see year-on-year pressure, given the OPR cut in early May and Alliance Bank’s relatively high variable-rate loan mix (FY19: 80%). We believe net interest margins (NIMs) will see sequential improvements, as the repricing of deposits continues. The year-to-date 15% share price correction appears to have priced in the margins compression and an unexciting loan growth.
We trimmed our earnings forecasts mainly on lower NIM assumptions, higher credit costs, and a slightly lower loan growth. As a result, the revised return on equity for FY20F and FY21F stand at 9.7% and 9.8%; our revised earnings forecasts imply about a growth of 6.4% and 5.9%.
We cut our NIM forecasts for Alliance Bank to 2.43% and 2.40% for FY20 and FY21 to reflect the OPR cut and fierce competition in growing current account savings account deposits. As per the management’s guidance, such a cut should shave off Alliance Bank’s NIMs by five to 10 basis points (bps). The former would have been at 2.5% to 2.55% for FY20F without the OPR cut.
Our FY20F and FY21F loan growth were adjusted to 6% and 5.5%, from 7% and 6%. System loan growth in the first half of FY19 remained tepid, due to unresolved trade war tensions and local policies still lacking support. However, we still believe Alliance Bank’s loan growth will outperform its peers by leveraging its niche in SME financing, prompting us to adjust the bank’s loan growth slightly lower.
Concerns over banking asset quality loom due to soft economic conditions and rising system gross impaired loans. Nonetheless, we take comfort that Bank Negara Malaysia has taken proactive measures to address such issues by reintroducing relaxed guidelines for SMEs’ rescheduled and restructured loans for two years. Alliance Bank will likely be one of the main beneficiaries, given its high exposure to the SME segment. Our credit cost assumptions for FY20 are largely unchanged at 34bps, but we expect credit costs to stay elevated at 34bps in FY21 on a dimming recovery outlook for 2020. — RHB Research Institute, Aug 13