Date: 18 October 2024
Broker: UOB Kay Hian
Company Overview
Alliance Bank Malaysia is the smallest financial group in Malaysia in terms of asset size. It primarily focuses on the consumer and SME segments, with 80% of its loan exposure concentrated in these areas. The bank’s strategy includes targeting sustainable growth in key segments such as mortgages and SME loans.
Stock Performance
- Share Price: RM4.54
- Target Price: RM4.38 (previously RM4.10)
- Upside: -3.6%
- Bloomberg Ticker: ABMB MK
- Market Cap: RM5,310.1 million (US$1,139.2 million)
- 52-Week High/Low: RM3.88 / RM3.22
- Dividend Yield: 4.8%
Major Shareholders
- Temasek Holdings (Private) Limited: 29.1%
- Employees Provident Fund Board: 8.3%
Key Financial Metrics (FY2024 – FY2027)
- Net Profit (RMm): 2024 – 690, 2025F – 747, 2026F – 798, 2027F – 846
- EPS (Sen): 44.4 (2024), expected to grow to 54.3 by 2027
- PE Ratio: 10.2x (2024), reducing to 8.4x (2027)
- Net Interest Margin: 2.48% (2024), forecasted to stabilize around 2.42% by 2027
- Cost/Income Ratio: 48.2% (2024), improving to 46.5% by 2027
- Loan Growth: 9.0% (2024F), 8.0% (2025F and beyond)
Loan Growth and Strategy
The bank’s loan growth is expected to moderate slightly from the annualized 10% pace in 1Q25 to a more sustainable 9%. This still aligns with management’s full-year guidance of 8-10%, which is above the sector average of 6.5%. Key drivers include:
- Mortgages: Expected to grow by 12%
- SMEs: Projected growth of 8%
The bank’s low CET1 ratio of 12.2%—the lowest in the industry—necessitates careful capital management. Management indicates that an optimal CET1 ratio of 12% is necessary to sustain 8% loan growth.
Net Interest Margin (NIM)
The bank expects a slight decline in NIM for 2QFY25 due to a 12-month fixed deposit campaign with a 4.1% rate, launched to strengthen its deposit base. However, NIM is forecasted to recover and stabilize by 3QFY25 as funding costs are optimized. The bank has issued bonds to replace more expensive corporate deposits and expects NIM to be around 2.40-2.45% for FY25.
Credit Cost and Asset Quality
- Gross Impaired Loans (GIL) Ratio: Slight increase to 2.17% in 1QFY25, primarily due to an uptick in Alliance One Account (AOA) loan portfolio, which has an elevated GIL ratio of 7.3%.
- Loan Loss Coverage (LLC): Currently at 97%, below the sector average of 113%. The bank is considering increasing management overlays to strengthen its loan loss provision buffers.
- Net Credit Cost: Expected to remain within the guidance of 30-35bp for FY25 despite slight sequential increases.
Non-Interest Income and Expense Management
The bank anticipates 7% growth in non-interest income for FY25, driven by strong performance in wealth management and forex income, although treasury income remains weak. Operating expenses are forecasted to normalize, with a full-year increase of 6% in FY25, down from a 13% increase in 1QFY25. The growth in expenses was primarily due to investments in staffing and IT to support SME and wealth management growth.
Valuation and Recommendation
- Target Price: RM4.38, maintained with a “HOLD” recommendation.
- Valuation: The stock is trading at +0.5 standard deviations above its historical mean P/B, reflecting high beta and strong loan growth. Current dividend yield (4.8%) is below the sector average of 5%.
- Recommendation Rationale: The bank’s growth prospects are largely priced in, and while its share price has outperformed the sector (up 33% year-to-date versus 24% for the sector), further upside is limited given the strong current valuation.
Environmental, Social, and Governance (ESG) Initiatives
- Environmental: Committed to providing RM30 billion in sustainable financing by 2040 and transitioning all stakeholders to zero carbon emissions by 2050.
- Social: Maintained 30% female directors on the Board and enhanced financial inclusion for vulnerable communities, including affordable housing financing.
- Governance: 60% of the Board comprises Independent Non-Executive Directors, ensuring robust governance practices.
