Published on 22 Nov 2019.
RAM Ratings has reaffirmed Alliance Bank Malaysia Berhad’s (the Group) A1/Stable/P1 financial institution ratings (FIRs) and the ratings of its debt facilities (Table 1). The FIRs continue to reflect the Group’s SME franchise, strong loss absorption buffers and favourable funding and liquidity positions.
Constituting just 2.5% of the banking system’s loans as at end-June 2019, Alliance Bank is the smallest of eight anchor banking groups in Malaysia. Nonetheless, the Group has carved a strong niche in SME lending, with a market share of close to 4% of SME loans. At 27% of total loans, Alliance Bank has one of the biggest proportions of SME loans among Malaysian lenders.
Given the Group’s pursuit of growth in segments that it views as generating better risk-adjusted returns, such loans made up a higher 44% of total loans as at end-June 2019 compared to 32% two years ago. These include Alliance One Account (AOA) loans, SME loans and personal financing. Launched in 2017, AOA is a product that allows borrowers to leverage against the equity in their properties to consolidate borrowings. AOA is the key driver of the Group’s loan growth, having expanded rapidly to make up 9% of total loans.
Alliance Bank’s gross impaired loan (GIL) ratio had eased y-o-y from 1.6% to 1.3% as at end-June 2019, outperforming the industry average of 1.6%. On a q-o-q basis, however, the ratio registered an uptick from 1.1%, mainly due to three corporate defaults and rising delinquencies from AOA loans originated prior to a credit tightening in June 2018. The Group’s credit cost ratio climbed correspondingly to an annualised 50 bps in 1Q FY Mar 2020 (full-year FY Mar 2019: 35 bps excluding one-time recovery from bad debt disposal) and is expected to remain higher y-o-y for full-year FY Mar 2020. Further asset quality slippage is likely, given further seasoning of the AOA portfolio and the challenging business environment. On balance, we draw some comfort from the Group’s sturdy GIL coverage ratio (inclusive of regulatory reserves) of 128% as at end-June 2019.
With current and savings account deposits making up 35% of its customer deposits as at end-June 2019 (industry: 26%), Alliance Bank’s deposit-funding capability is strong. This proportion is one of the highest among domestic banking groups and bears testimony to its franchise. Armed with a sizeable mix of retail and transactional deposits that are accorded lower run-off rates under the Basel III framework, Alliance Bank’s liquidity coverage ratio was a high 171% as at end-June 2019 (industry: 153%). Its net stable funding ratio is also comfortably above the 100% requirement.
Alliance Bank’s pre-tax profit came in at RM708 mil in FY Mar 2019, translating into a satisfactory return on risk-weighted assets of 2.0% – unchanged since FY Mar 2016. Pre-tax profit, however, was 43% lower y-o-y at RM104 mil in 1Q FY Mar 2020 primarily owing to full impairment on a recently defaulted bond and increased loan impairments. At the pre-provision level, the decline in operating profit was a smaller 4% y-o-y. The Group’s performance for full-year FY Mar 2020 will be softer as loan impairments remain heftier y-o-y.
Thanks to profit accretion, Alliance Bank’s common equity tier-1 capital ratio had improved y-o-y from 12.8% to 13.5% as at end-June 2019. Its total capital ratio of 18.7% is among the highest in the industry. The Group’s capitalisation provides a robust buffer against asset quality headwinds.
RM1.5 bil Senior MTN Programme (2015/2045)
RM2.0 bil Subordinated MTN Programme (2015/2045)
RM500 mil CP Programme (2015/2022)
RM1.0 bil Additional Tier-1 Capital Securities Programme (2017/-)
Lim Yu Cheng, CFA, FRM
(603) 3385 2492
(603) 3385 2577
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Ratings on Alliance Bank Malaysia Berhad