Low CCOR in 3QFY22 not sustainable
? 9MFY3/22 net profit was above our expectation (97% of our full-year forecast) due to lower-than-expected LLP.
? We view the low CCOR of 14bp in 3QFY22 as unsustainable and hence project a 271.7% qoq increase in 4QFY22F LLP.
? Reiterate Reduce as we think Alliance faces greater credit risks from Covid19, as its GIL ratio of 2% at end-Dec 21 was above industry’s 1.44%.
9MFY22 net profit above expectation
Alliance Bank’s 9MFY3/22 core net profit (CNP) was above expectation, accounting for 97% of our full-year forecast and 95.6% of Bloomberg consensus’. The variance to our forecast primarily emanated from higher-than-expected net interest income and lower-than-expected loan loss provisioning. 9MFY22 CNP surged 53.9% yoy, driven by 12.8% yoy rise in net interest income and 63.7% yoy decline in loan loss provisioning (LLP).
3QFY22 net profit lifted by lower LLP
3QFY22 revenue growth was uninspiring at only 0.9% yoy due to a 39.3% yoy drop in non-interest income. Notwithstanding this, 3QFY22 net profit surged 50.2% yoy, catalysed by an 89.9% yoy plunge in 3QFY22 LLP.
Lower CCOR in 3QFY22 not sustainable
Alliance Bank’s credit charge-off rate (CCOR) plunged from 139bp in 3QFY21 to a mere 14bp in 3QFY22; this was even lower than the pre-Covid-19 level of 42bp (average for the eight quarters in 2018-19). We believe the lower 3QFY22 CCOR is not sustainable as the credit risks from Covid-19 has yet to fully subside. Hence, we forecast a 271.7% qoq rise in 4QFY22 LLP, leading to our projection of a 13% qoq drop in 4QFY22 CNP.
Upping FY22-24 CNP forecasts and target price
We raise our FY22-24F CNP forecasts by 16-25% as we (1) increase our FY22-24F net interest income forecasts by c.13%, and (2) cut our FY22F LLP forecast by 19.9%. This lifts our DDM-based target price from RM2.73 to RM3.17.
Maintain Reduce on Alliance
Despite the decline in 9MFY22 LLP, we still think that Alliance Bank faces greater credit risks from the Covid-19 outbreak than its peers as its end-Dec 21 gross impaired loan (GIL) ratio of 2% was higher than the industry’s 1.44%. The key potential de-rating catalyst that underpins our Reduce rating is a wider increase in GIL ratio relative to peers when the industry’s GIL ratio peaks in mid-2022F. We prefer Hong Leong Bank for exposure to the banking sector.