KUALA LUMPUR: Street estimates have turned more bullish on Alliance Bank Malaysia Bhd, prompting an upgrade in its financial years 2022-2024 (FY2022-2024) earnings per share estimates, says Affin Hwang Capital.
"Alliance Bank, which dropped out-of-favour over the past two years due to investors' concern over its asset quality, is now making a comeback. The bank's earnings had outperformed consensus estimates for the past two consecutive quarters, and as such, prompted street upgrades.
"The market has certainly been impressed by management's initiative to contain rising credit risks during the height of the pandemic which partially emanated from increased exposure to the high riskadjusted return accounts under its debt-consolidation service, Alliance One Account," Affin Hwang said.
The firm believes that lower net credit cost (NCC) will be one of the key drivers to stronger earnings forecasts for Alliance Bank.
It said Alliance Bank had guided a potential NCC target of lower than 75 basis point (bps) for FY22 earnings.
However, Affin Hwang said as at nine-month financial year 2022, Alliance had achieved a 29.3bps, of which annualised, would be close to 60bps.
"As October-December 2021 have been quite positive with the reopening of the economy, coupled with a decline in the unemployment rate to 4.3 per cent in October 2021, Alliance Bank may not necessarily need to set aside additional management overlays in the second half of FY22. At present, Alliance Bank has management overlays totaling RM400 million as precautionary buffers," it said.
According to Affin Hwang, a 10bps decline in NCC would likely result in 6.4 per cent to 7.0 per cent to FY22 to FY24 earnings net profit.
"Based on our estimates, every 10bps decline in Alliance Bank's NCC may result in an enhancement of between 6.4 per cent to 7.0 per cent in FY22 to FY24 earnings net profit, while raising the return on equity (ROE) level by 0.5ppts," it said.
The firm has reiterated its "Buy" rating on Alliance Bank and maintained its target price of RM3.50.
Key earnings drivers are sustained net interest margin (NIM) at 2.42-2.43 per cent and steady operating income generation of circa RM1.83 to RM1.88 billion for FY22 to FY24 earnings.
"Downside risks to asset quality are well cushioned by buffers (cumulative at RM400 million) and derisking of its balance sheet (and as such, marginal loan growth is expected). The group remains a niche player targeting the affluent consumer and small and medium enterprises markets in key cities," it added.
