KUALA LUMPUR (April 14): Hong Leong Investment Bank (HLIB) said that Alliance Bank Malaysia Bhd’s recent share price weakness led to a favourable risk-reward profile, despite the bank's dim outlook, as its valuations remain inexpensive with a cash dividend yield of 6% to 7%, along with high management provision overlays.
Analyst Chan Jit Hoong of HLIB retained its "buy" call on Alliance, with a target price (TP) of RM4.15, based on 0.91 times 2023 price-to-book value, with assumptions of 10.2% return on equity, 10.9% cost of equity, and 3.0% long-term growth.
He said the TP is above its five-year average of 0.79 times, but in line with the sector's 0.87 times, and the premium return on equity output is two percentage points higher than its five-year mean.
He added that Alliance was "too prudent" in its net credit cost (NCC) and net interest margin (NIM) guidance, which may lead to upside surprises in the next reporting period.
“Overall, we kept our earnings estimates for the financial year ended March 31, 2023 (FY2023) to FY2025.”
Chan expects the percentage of loans under relief (LUR) to drop further over the next six month, as business loans have moved away from Covid-19 financial assistance and resumed full payment, while 67% of retail LUR were mostly collateralised.
Alliance has maintained its FY2023 NCC guidance at 35 to 40 basis points (bps), implying an annualised 60 to 80 bps for the fourth quarter ended March 31, 2023 (4QFY2023), he said.
As for Alliance's NIM, it was projected to reach 2.55% to 2.60% in FY2023, indicating a sharp decline in 4QFY2023 to 2.20%-2.40%.
“We feel that the NIM guidance was overly conservative, and it may surprise on the upside.
“Based on our channel checks, we got a sense that price competition for fixed deposits in the market has tapered, and this should provide some respite to NIM contraction,” added Chan.
He also stated that growth targets for loans in FY2023 were up by 4% to 5% involving the small and medium enterprise and commercial banking segments.
“Growth in corporate loans is seen to return, following the completion of its de-risking activities.”
The gross impaired loan (GIL) ratio was forecast to peak below 3% as delinquency rates rose, yet loans under Alliance’s watch list indicated no new concerns.
The uptick in the GIL ratio for its mortgage refinance service — the Alliance One Account — was not worrying since its comparable loss given default and loan-to-value to classic mortgages were at 25% and 90%, he said.
Alliance Bank’s share price was unchanged at RM3.32 at the time of writing on Friday (April 14), valuing the bank at RM5.16 billion.