Introduction

Alliance Bank Malaysia Berhad (ABMB) is poised for a promising second quarter of FY25, with expectations of robust loan growth and stable net interest margins (NIMs). This comprehensive analysis delves into the bank’s financial performance, strategic initiatives, and future prospects, providing detailed insights into various aspects of its operations.

Financial Performance Overview

ABMB’s 2QFY25 results, expected on November 28, 2024, are anticipated to be decent, driven by strong loan growth and stable NIMs. While credit costs remain elevated due to asset quality pressures, the bank maintains its FY25E net profit forecast and raises FY26/27E earnings by 2%/1% on lower credit cost assumptions. The target price (TP) is increased to MYR5.30 from MYR4.60, based on a higher CY25E price-to-book value (PBV) of 1.0x, supported by a CY25E return on equity (ROE) of 10%.

Loan Growth Continues to Impress

ABMB’s management targets loan growth of 8-10% for FY25, a goal that appears achievable given the robust growth across all business segments, particularly SME lending. The FY25E loan growth forecast has been raised to 9% from 8%, reflecting this positive trend. NIMs are expected to remain stable quarter-on-quarter (QoQ) in 3QCY24, although seasonal deposit competition in 4QCY24 may exert some pressure. The FY25E NIM forecast of 2.43% aligns with management’s guidance of 2.40-2.45%.

Credit Cost Assumptions

Despite the pressure on asset quality, especially from the Alliance ONE Account, ABMB maintains an elevated credit cost assumption of 35 basis points (bps) for FY25E, up from 32bps in 1QFY25. However, with MYR121 million in management overlays, the FY26E credit cost assumption is lowered to 30bps from 33bps.

ACCELER8 Strategy: Driving Growth and Innovation

ABMB’s 8-pronged ACCELER8 strategy, launched in January 2022, is showing positive results. The bank is adding 10,000 new retail customers per month, thanks to new products and services. The strategy emphasizes SME lending, with senior management actively involved in customer engagement and the effective deployment of relationship managers (RMs) at branches and commercial centers.

Key Metrics

The key financial metrics for ABMB show a positive trend. Operating income, pre-provision profit, and core net profit are all expected to grow steadily over the next few years. The bank’s core fully diluted earnings per share (FDEPS) and net dividend per share (DPS) are also projected to increase, reflecting its strong financial health and commitment to shareholder returns.

• Operating Income: FY23A – MYR1,920m, FY24A – MYR2,020m, FY25E – MYR2,186m, FY26E – MYR2,274m, FY27E – MYR2,368m
• Pre-Provision Profit: FY23A – MYR1,038m, FY24A – MYR1,047m, FY25E – MYR1,168m, FY26E – MYR1,216m, FY27E – MYR1,272m
• Core Net Profit: FY23A – MYR678m, FY24A – MYR690m, FY25E – MYR728m, FY26E – MYR776m, FY27E – MYR808m
• Core FDEPS (MYR): FY23A – 0.44, FY24A – 0.45, FY25E – 0.47, FY26E – 0.50, FY27E – 0.52
• Net DPS (MYR): FY23A – 0.22, FY24A – 0.22, FY25E – 0.24, FY26E – 0.25, FY27E – 0.26
• Core FD P/E (x): FY23A – 7.8, FY24A – 8.3, FY25E – 9.6, FY26E – 9.0, FY27E – 8.6
• P/BV (x): FY23A – 0.8, FY24A – 0.8, FY25E – 0.9, FY26E – 0.9, FY27E – 0.8
• Net Dividend Yield (%): FY23A – 6.5, FY24A – 6.0, FY25E – 5.2, FY26E – 5.6, FY27E – 5.8

Latest Developments

Industry deposit competition slowed down in 3QCY24, resulting in a stable NIM of 2.45% in 2QFYE3/25. However, seasonal deposit competition in 4QCY24 is expected to create some NIM pressure. Overall, NIMs are projected to trend within management’s guidance of 2.40-2.45% for FYE3/25, implying a year-on-year (YoY) compression of 3-8bps. The FY25E NIM forecast is set at 2.43%.

Loan Growth Targets

ABMB aims for an 8-10% loan growth for FY25, with an annualized loan growth of 9.7% as of June 2024. This target appears achievable, especially with strong growth across all business segments, particularly SME lending, expected to advance at a double-digit pace. Consequently, the FY25E loan growth forecast has been raised to 9% from 8% previously.

Credit Cost Assumptions and Gross Impaired Loans

The group’s gross impaired loans (GILs) increased by 5% QoQ as of June 2024, primarily due to defaults related to the Alliance ONE Account (AOA). The uptrend in GILs is expected to continue gradually. Net credit cost was 32bps in 1QFY25, and pressure on asset quality is likely to persist, justifying an elevated credit cost assumption of 35bps for FY25E, at the higher end of management’s guidance of 30-35bps. ABMB still holds management overlays of approximately MYR121m as of June 2024. Given the expected buoyant economic growth into 2025, the FY26E credit cost assumption has been reduced to 30bps from 33bps.

ACCELER8: A Strategic Initiative for Growth

Launched in January 2022, ABMB’s 5-year group strategy, ACCELER8, focuses on eight key pillars designed to drive growth and innovation:

1. Sustain SME Expansion Strategy: With the largest exposure to SMEs among domestic banks, ABMB aims to enhance SME penetration through senior management involvement and an RM model that actively seeks out SME customers.
2. Support Customers Through Their Life Cycle: Expanding product and service offerings to grow its fee income base, ABMB provides various forms of financing, trade lines, revolving credits, and other services appealing to retail and SME clients.
3. Broaden Consumer Business: Targeting high net worth individuals and young professionals, ABMB offers wealth management products, basic SavePlus accounts, Classic Mortgage products, and digital credit cards. The bank has been acquiring about 10,000 new consumer customers per month over the last 18 months.
4. Target Resilient Ecosystems: Focusing on sustainability financing, ABMB aims for
5. Regional Champion for Selected Corridors: ABMB plans to grow its business in the northern and southern regions of Peninsular Malaysia and the Sarawak region, capitalizing on relocation of E&E manufacturing, spillover businesses from data centers, and government investment initiatives.
6. Drive Synergies in Corporate & Capital Market Business: Following the sale of its stockbroking business, ABMB aims for greater cooperation between corporate banking and capital market divisions to provide expanded services and product offerings.
7. Accelerate Islamic Business: Contributing about 25% of the group’s total assets and revenue, ABMB’s Islamic banking segment is growing at about 30% per annum. Initiatives include assisting SME customers in obtaining halal certification with free consultancy and certification services.
8. Leverage Partnerships: Through strategic partnerships with organizations like UNGC and Bursa Malaysia, ABMB offers free consultancy services to SME customers for sustainability practices, enabling them to obtain cheaper sustainability financing.

Risk Statement

As the smallest domestic financial institution in Malaysia in terms of asset size, ABMB lacks the economies of scale of its peers, which could hinder future market share gains. Additionally, its primary niche in SME financing could face increased competition from larger banks vying for a share of this lucrative market.

Conclusion

Alliance Bank Malaysia Berhad is on a growth trajectory, driven by robust loan growth, stable NIMs, and strategic initiatives under its ACCELER8 program. While challenges such as elevated credit costs and competition in the SME segment persist, ABMB’s focused approach and innovative strategies position it well for future success.