Alliance Bank’s asset quality to face pressure

PETALING JAYA: Alliance Bank Malaysia Bhd’s asset quality is expected to face pressure from non-residential property gross impaired loans due to the ongoing supply glut, said UOB Kay Hian Research.

The research house said the bank’s non-residential property gross impaired loans (GIL) ratio had been trending upwards at a sharper trajectory than that of the banking sector.

The ratio had increased from 0.61% in the second quarter of 2017 to 2.25 % in the fourth quarter of financial year 2018 (FY18) versus the sector’s more modest increase from 0.99% to 1.25% over the same period.

It also said that Alliance Bank’s GIL ratio had been on a rising trend over the past six quarters compared to the industry’s relatively stable GIL trend.

“In terms of overall loan exposure in this segment, Alliance Bank also has a large composition at 17% of total loans base compared to the sector average of 13%.

“Given the challenging supply demand dynamics that the com- mercial property sector will continue to face, we think the group’s overall asset quality could continue to face pressure from this loan segment,” UOB Kay Hian said.

It noted that Alliance Bank’s non-residential property asset quality woes had resulted in a relatively sharp uptrend in the group’s GIL ratio from 0.94% in the second quarter of FY17 to 1.43% in the fourth quarter of FY18 whereas the industry’s overall GIL ratio has actually improved by 7 basis points to 1.57% over the same period.

“The group had reported a sharp spike in non-residential property GIL (+88% quarter-on-quarter, RM74mil) in the fourth quarter of FY18.

“We understand that it pertains to a lumpy commercial property development that had faced some cashflow constraints due to delays in launches,” it said.

UOB Kay Hian said the lumpy impairments could be written back by the second quarter of FY19 to the third quarter of FY19 after having undergone a restructuring and rescheduling.

“We also note that to compete with the larger banks, the group has built a niche in the small and medium enterprise (SME) customer segment for both working capital financing and purchase of non-residential property.

“These customers may have a shorter operating track record and hence higher inherent risk during more challenging economic periods. We note that only 65% of the group’s SME portfolio (25% of group loans) is collateralised,” it added.

UOB Kay Hian maintained its “hold” rating on Alliance Bank with an unchanged Gordon Growthderived target price of RM4.30 (premised on 1.19 times FY19 forecast price-to-book ratio and a 10% return on equity).

It said potential weakness in the bank’s non-residential property asset quality trends could cap share price performance as provision normalised upward.

“That said, current dividend yield of 4.2% (compared to industry average of 3.5%) should provide some share price support. We think that a better entry level is at RM3.90,” it said.