This article first appeared in The Edge Financial Daily on April 20, 2018

Alliance Bank Malaysia Bhd
(April 19, RM4.48)
Maintain buy with a target price of RM4.80: Alliance Bank Malaysia Bhd remains operationally strong with steadily improving net interest margin (NIM), stable fee income generation, and a sound loan book (as implied by a gross impaired loan [GIL] ratio of 1.18%, loan loss coverage of 121.9% in first nine months of financial year 2018 [9MFY18]). There is potential for earnings upside in FY19 after the completion of a transformation exercise in FY18, leading to higher sale productivity to drive operating income expansion while the cost-to-income ratio may see further improvement. Meanwhile, we do not expect a detrimental impact on its earnings with the adoption of the Malaysian Financial Reporting Standards 9.

Being a smallish bank, Alliance’s core strategy has been boosting the higher “risk-adjusted return” (RAR) loans as the group does not compete directly in the same space as the large-sized banks do. The strategy has worked well, and this has been reflected by its higher NIMs (9MFY18: 11 basis points) and the expansion in fund-based income (9MFY18: 5.6% year-on-year) despite flat loan growth as at December 2017. Overwhelmingly positive response to the Alliance One Account loan consolidation account with loan approvals of RM1.5 billion year to date will be a boost to the higher RAR portfolio.

Alliance undertook a transformation exercise at the start of FY18, targeting small and medium enterprises, migration of consumer loan accounts, streamlining and restructuring branches, beefing up the sales workforce and on technology/marketing.

Given Alliance’s sound asset quality (GIL ratio of 1.18%), in our view, the balance sheet adjustment for additional provisions on day one (starting April 1) should not be an issue. Reaffirm “buy” on Alliance, with a 12-month TP of RM4.80 based on a 1.3 times calendar year 2018 estimate (CY18) price-to-book value multiple, underpinned by a CY18 return on equity of 9.7% and a 8.6% cost of equity. Though FY18 is expected to see a dip in earnings, we believe that FY19 will be a year where there will be more earnings upside due to potentially higher revenues and the absence of the one-off transformation cost. — Affin Hwang Capital Research, April 19