Kenanga Research has maintained its Outperform call and RM5.50 target price on Alliance Bank Malaysia Berhad (ABMB), after the lender’s 1QFY27 net profit rose 25% year-on-year to RM248.3 million, aided by exceptionally low credit costs.
The quarterly earnings accounted for 28% of Kenanga’s full-year forecast, with the research house highlighting credit cost improvements as a key driver of the stronger bottom line.
Both net interest income (NII) and non-interest income (NOII) increased 2.5% year-on-year.
Loan growth of 8.1% helped offset pressure on net interest margins (NIM), which narrowed to 226 basis points (bps) from 242bps in the corresponding quarter last year.
Pre-provision operating profit (PPOP), however, was marginally lower year-on-year as operating costs increased.
Personnel and information technology expenses contributed to a 7.8% increase in costs, pushing Alliance Bank’s cost-to-income ratio (CIR) to 47.4% from 45.1% a year earlier.
Despite the margin and cost pressures, profit after tax and minority interests (PATAMI) climbed 21% quarter-on-quarter and 25% year-on-year.
The improvement was supported by a credit cost of just 3bps, benefiting from corporate provision writebacks pursued earlier by the bank and improvements in rating migration within its SME portfolio.
Deposit Growth Outpaces Industry
Kenanga said Alliance Bank’s ability to maintain a healthy current account savings account (CASA) ratio remains important in securing quality deposits amid competition for funding.
The bank’s CASA ratio stood at 37.7%, broadly stable compared with 38% in 1QFY26.
Deposits increased 8.4% year-on-year, outperforming the broader banking industry.
Loans and unrated bonds, meanwhile, expanded 9.5%.
Alliance Bank continues to target growth of between 7.5% and 10% for loans and unrated bonds, although it is reducing its growth appetite for unsecured consumer financing.
Kenanga noted some increase in delinquencies within the less-than-30-days-past-due category for unsecured consumer financing.
This shift, together with competitive pressure for deposits, contributed to Alliance Bank lowering its NIM guidance by as much as 7bps.
However, the expected improvement in credit costs should help counterbalance weaker margins, allowing the bank to maintain its return-on-equity (ROE) guidance.
Potential For 50% Dividend Payout
Kenanga also highlighted the potential for stronger shareholder returns following the implementation of the Basel III final reforms.
Alliance Bank indicated that it would consider progressively increasing its dividend payout rather than making a one-off distribution after receiving an estimated 60bps to 70bps capital benefit from the reforms.
The bank currently has a Common Equity Tier 1 (CET1) ratio of 13%.
Based on its existing growth trajectory and assuming its risk-weighted asset density remains at around 63%, Kenanga estimates that Alliance Bank could increase its dividend payout ratio to 50% while maintaining a CET1 ratio of approximately 13%.
This provides scope for higher recurring shareholder distributions without materially compromising the bank’s capital position.
Wealth Management Supports Fee Income
Alliance Bank maintained its loan growth outlook despite lowering its NIM expectations, while its CIR guidance remains at between 47.5% and 48.5%.
Kenanga believes the cost guidance is achievable, supported partly by improving momentum within the bank’s non-interest income franchise.
The research house highlighted stronger client-related income, particularly from wealth management, as a positive development compared with treasury and markets income, which was a drag on a year-on-year basis.
Kenanga is nevertheless monitoring the 13.3% quarter-on-quarter increase in Alliance Bank’s treasury assets amid higher Malaysian Government Securities yields.
However, as most of these assets are held under fair value through other comprehensive income (FVOCI) and amortised cost portfolios, the research house expects relatively limited volatility to flow through the bank’s profit and loss statement.
Credit Cost Forecast Cut To 20bps
Following the first-quarter performance and Alliance Bank’s move away from riskier consumer financing, Kenanga lowered its credit cost forecast to 20bps from 34bps.
The research house described the revised assumption as conservative, estimating that 1QFY27 credit cost would have been around 15bps after adjusting for pre-emptive provision drawdowns and corporate writebacks.
At the same time, Kenanga lowered its NIM assumption by 5bps to reflect the more challenging funding and margin environment.
The offsetting adjustments leave its overall investment view intact.
Kenanga retained its RM5.50 target price, based on an unchanged Gordon Growth Model-derived price-to-book value of 1.0 times, incorporating a 10% cost of equity, 3% terminal growth rate and 10% ROE.
A 5% ESG premium is also incorporated into the target price, reflecting Alliance Bank’s four-star ESG rating and what Kenanga views as the lender’s strong sustainable financing pipeline and policies.
Key downside risks include a sharper-than-expected margin squeeze, weaker loan growth, deterioration in asset quality, slower capital market activity, unfavourable currency movements and changes to Bank Negara Malaysia’s Overnight Policy Rate.
