Positive view on Alliance Bank
Brokerage keeps ‘buy’ call despite prolonged stress on asset quality
PETALING JAYA: RHB Research Institute remains positive on Alliance Bank Malaysia Bhd, although it expects stress on the bank’s asset quality to be prolonged if the economic slowdown continues.
The research house, which has maintained a “buy” call on the stock, said that the slower economic growth may lead to further impairments by the bank, particularly for the commercial and small and medium enterprise (SME) segments.
The bank’s absolute impaired loans rose sharply to RM577.5mil as at end-March, up from RM461.8mil in December 2017. Of the RM577.5mil impaired loans, about RM74.1mil arose within the non-residential segment.
“We understand that the loans were for the development of shophouses, which was then deferred and the loans had to be restructured. The management hopes to reverse the impairments by yearend,” it said in a note.
Meanwhile, as at end-June, total impaired loans rose to RM637.2mil, with the sharpest increase coming from the non-residential and working capital segments.
“Still, the loans are mostly secured and should have an immaterial impact to credit cost,” stated RHB Research.
On the total loan growth, the research firm pointed out that Alliance Bank had maintained its 10% target for financial year 2019.
Currently, Alliance Bank is seeing good traction in its SME and commercial portfolios. RHB Research said this was further helped by a campaign launched recently to top up customers’ working capital lines.
“However, the management flagged that it had received feedback from the SME customers, whose businesses are being affected by now tighter consumer spending.
“While residential mortgages (39% of portfolio) are still showing signs of growth, the oversupply in the non-residential segment (18% of portfolio) has dampened rental yields and growth,” it said.
Moving forward, Alliance Bank is expected to record a flat net interest margin (NIM), given the intensive competition for deposits from other banks.
NIM is a measure of the difference between interest income generated by banks and interest paid out to depositors.
The average lending rate and the three-month fixed-deposit spread serves as a proxy for the banking sector’s NIM.
“While asset yields are higher through better risk-adjusted-return loans, the cost of funds is also rising,” said the research house.
Alliance Bank is pushing for a higher current account savings account value at 37% of total deposits, through SME customer acquisitions and its Cash2Home campaign, a foreign employee remittance service.
Recently, the bank also launched the Alliance SavePlus Account, a current account with tiered interest rates.
Share price-wise, RHB Research has a target price of RM4.80 for the stock.
“While we believe there is little room for an upward revision in earnings – given the muted sector outlook – the downside should be capped, as its share price has retraced by over 10% from a high after the 14th general election,” it said.