Alliance Bank: Tracking Expectations and Maintaining BUY

Alliance Bank Malaysia Berhad (ABMB) has maintained robust loan growth and stable margins, leading to a continued BUY recommendation from analysts at Maybank Investment Bank. The 12-month price target remains unchanged at MYR 4.35, reflecting a potential 12% upside from the current share price of MYR 3.88.

Alliance Bank: Loan Growth Momentum

ABMB’s loan growth remains strong, with an estimated average growth of 8% for FY25, driven mainly by lending to SMEs and personal financing. Mortgage lending is expected to grow at a measured pace due to intense price competition, while corporate lending remains selective. The bank’s net interest margins (NIMs) are anticipated to stay stable within the 2.40-2.45% range.

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Non-Interest Income and Expenses

Non-interest income (NOII) is projected to hold up well, following a 14% year-over-year expansion in FY24. The cost-to-income ratio (CIR) is expected to remain stable around 48%, with expense growth tracking revenue growth as the bank continues to invest in its digital and IT infrastructure.

Financial Tracking and Guidance

ABMB’s financials are on track with management’s guidance, including:

• Loan growth target of 8-10% for FY25 (FY24 actual: 13.6%).
• NIMs of 2.40-2.45% (FY24: 2.48%).
• CIR around 48% (FY24: 48.2%).
• Credit cost guidance of 30-35 basis points (FY24: 25.8bps).

Room for Rerating

The current FY25 estimated return on equity (ROE) of 9.9% is slightly below management’s target of over 10%. Sustaining ROEs above 10% could potentially lead to further rerating of the bank’s stock. ABMB’s CET1 ratio stands comfortably at 12.5%, and the bank offers attractive dividend yields of around 6%, with an expected dividend payout ratio of 50%.

Asset Quality and Credit Costs

Asset quality remains stable, although there is a slight deterioration in the SME segment. The group’s gross impaired loan (GIL) ratio improved to 2.11% as of March 2024. Credit costs are expected to increase to 30-35 basis points in FY25, up from 25.8bps in FY24.

Capital Levels and Dividend Yields

ABMB’s capital levels are deemed comfortable, with a CET1 ratio of 12.5% as of March 2024. The bank’s dividend payout ratio is expected to be around 50%, providing attractive yields of over 6%.

Investment Thesis

Loan Growth Momentum

Loan growth continues to be encouraging, driven by double-digit growth in the SME and commercial banking segments. Consumer loan growth is supported by personal financing, while mortgage growth remains moderate due to competitive pricing.

CASA Growth Challenges

While CASA growth remains challenging, ABMB maintains a high CASA ratio of 41.6%. Excluding the Alliance SavePlus digital savings account, the ratio stands at approximately 35%.

Stable NIMs

ABMB’s net interest margins are expected to remain stable within the 2.40-2.45% range in FY25, with the bank not aggressively pursuing deposit growth.

Non-Interest Income

NOII is expected to remain strong, supported by wealth management income and potentially better performance in investment and forex income.

Expense Management

ABMB’s cost-to-income ratio is projected to stay around 48%, with expenses growing in line with revenue as the bank invests in digital and IT infrastructure.

Asset Quality and Credit Costs

Asset quality remains stable, with a slight increase in the SME segment’s GIL ratio. Credit costs are expected to rise to 30-35 basis points, in line with management’s guidance.

Comfortable Capital Levels

ABMB’s capital levels are robust, with a CET1 ratio of 12.5%. Dividend yields are attractive, expected to be over 6% with a 50% payout ratio.

Risks and Considerations

As the smallest domestic financial institution in Malaysia, ABMB lacks the economies of scale of its larger peers, which could impact future market share gains. The bank’s niche in SME financing may also face increased competition from bigger banks.

Alliance Bank remains a strong buy with a stable financial outlook, robust loan growth, and attractive dividend yields. Investors are encouraged to consider ABMB for its solid fundamentals and potential for continued growth.