This article first appeared in The Edge Financial Daily on October 10, 2019

Alliance Bank Malaysia Bhd
(Oct 9, RM2.65)
Maintain buy with a lower target price of RM3.40: We met up with management last week to get some operational updates. Overall, we find that Alliance Bank Malaysia Bhd’s near-term outlook is not all rosy.

While the focus to drive up better risk-adjusted return (RAR) loans has been successful over the past three years (was able to improve net interest margin [NIM] and boost credit demand), growth here has now been tapered sequentially (+2.7% quarter-on-quarter [q-o-q]). In turn, this has dragged down overall lending growth to be flattish q-o-q.

However, the strategy for better RAR loan acquisition remains relatively unchanged — where management courts small- to medium-sized enterprise trade financing and working capital space but has tightened its Alliance One Account’s origination policy to control delinquencies. Together with a tough operating climate, management now sees slower financial year 2020 (FY20) loan growth of 5% to 6% from around 7% earlier.

Considering the full three-month impact from May 2019’s overnight policy rate (OPR) cut, second quarter of FY20’s (2QFY20) NIM would be affected the most. However, in the following quarter, it should recover, since 66% of its non-Casa (current account and savings account) deposits are due for maturity within six months (calculated from March 2019 onwards) and will be repriced downwards.

That said, during an interest rate cut, we find that Alliance stands to lose most among local banks; based on our estimates, every 25 basis-point (bps) reduction in OPR would see its NIM slipping by -6bps and profit falling by 5% versus sector’s -4bps and -3% respectively. For FY20, management is still guiding NIM to compress 5bps to 10bps; however, should there be another OPR cut, FY20 NIM is expected to narrow by 10bps to 20bps instead.

To improve fee income, management is now looking to milk the 15-year bancassurance tie-up it has with Zurich Insurance. Besides, Alliance is enhancing the capabilities of its relationship managers to help increase business opportunities and also, expand cross-selling efforts to customers that were acquired through recent deposit campaigns.

We gathered that these initiatives are expected to lift FY20’s fee income by 5% to 6%. As for investment income, management shared that they do not heavily and actively manage their treasury books to maximise alpha from speculative position on interest rate direction.

Hence, we think chalking RM80 million to RM85 million per quarter run rate for non-interest income (NOII) would be difficult, seeing that the average is only RM66 million per quarter from 1QFY19 to FY20.

Net credit cost guidance for FY20 was kept at lower than 40bps. Management shared that all three problematic loan accounts are fully provided for and recovery plans are ongoing.

With regard to a recent rumour on a well-known property developer being cash-strapped, management viewed that there were still no major financial peculiarities that warrant a concern. Also, from the overall tone, it seemed to us that this account is currently classified under stage one performing loan.

We cut our FY20 to FY22 net profit forecasts by 4% to 6% to reflect slower loan growth (to 5% from 6%), higher NIM slippage (factoring in another 1bps to 3bps decline), and softer NOII contribution — mainly from lower investment income (to a three-year compound annual growth rate of 7.4% from 10%). — Hong Leong Investment Bank Research, Oct 9