Published on 27 Nov 2020.
RAM Ratings has reaffirmed the entity and debt ratings of Alliance Bank Malaysia Berhad (Alliance Bank) and its subsidiaries (collectively the Group) under our coverage (listed in Table 1), while maintaining the stable outlook on the ratings.
The reaffirmation of Alliance Bank’s ratings is premised on our expectation that the Group’s strong loss absorption buffer and healthy earnings generation will sufficiently meet greater provisioning needs over the next one to two years. At the same time, its funding and liquidity position is anticipated to remain favourable. As the Group entered the current crisis with strong financial metrics, there is enough rating headroom to tolerate a deterioration in financial performance. However, the ratings would come under considerably increased pressure if the decline is deeper or more prolonged than we currently expect.
The Group had been beset by lumpy corporate impairments and rising delinquencies in its mortgage portfolio prior to the onset of the pandemic. Alliance Bank’s gross impaired loan (GIL) ratio of 1.9% as at end-June 2020, while having eased q-o-q, remained its highest in recent years, as did its credit cost ratio which rose to an annualised 0.8% in 1Q FY Mar 2021. Credit costs, both actual and pre-emptive, are envisaged to stay lofty and above the historical trend in the near term. That said, we acknowledge Alliance Bank’s more stringent impaired loan classification policy compared to industry practice. Adjusting for the difference, its GIL ratio is estimated to be lower at 1.5%.
The Group’s mortgage portfolio, particularly its pre-2018 Alliance-One-Account loans – a mortgage refinancing product with debt consolidation features – is still a concern while its disproportionately larger SME exposure renders it susceptible to a protracted economic downturn. However, the Group’s active management of vulnerable exposures including tightening underwriting standards, supported by a low interest rate environment, should reduce the risk of defaults.
Loan loss coverage, including regulatory reserves, remained strong at 102.6% as at end-June 2020. Complementing this is the Group’s solid capitalisation. Standing at 14.5% as at end-June 2020, its common equity tier-1 capital ratio will be reinforced by the pause in second interim dividends for 2020. Due to a rich pool of high-yielding loans and favourable funding base, Alliance Bank is in a good position to withstand margin compression from successive rate cuts. We continue to expect the Group to deliver sufficient pre-provision profits to cushion a significant rise in credit losses.
In FY Mar 2020, the Group’s pre-tax profit sank 20% y-o-y to RM567.9 mil, dampened by a two-fold increase in impairment charges brought about by several large corporate accounts and weakness in its mortgage portfolio. For the quarter ending June 2020, Alliance Bank turned in a higher y-o-y pre-tax profit of RM139.8 mil (+35%), owing in part to the absence of lumpy impairment costs. Despite the cumulative 100-bps reduction in the OPR from January to June 2020, the Group still registered an enviable annualised net interest margin of 2.2% in 1Q fiscal 2021.
The financial institution ratings of the Group’s core subsidiaries, Alliance Islamic Bank Berhad and Alliance Investment Bank Berhad, are equated to those of Alliance Bank, considering their strategic importance to the latter.
Alliance Bank Malaysia Berhad
Financial Institution Ratings
RM500 million Commercial Papers Programme (2015/2022)
RM1.5 billion Senior Medium-Term Notes Programme (2015/2045)
RM2.0 billion Subordinated Medium-Term Notes Programme (2015/2045)
RM1.0 billion Additional Tier-1 Capital Securities Programme (2017/-)
Alliance Islamic Bank Berhad
RM300 million Islamic Commercial Papers Programme (2019/2026)
RM2.5 billion Perpetual Sukuk Programme (2019/-):
Alliance Investment Bank Berhad
Chan Yin Huei
(603) 3385 2498
(603) 3385 2577
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Published by RAM Rating Services Berhad
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Rating Rationale: Alliance Bank Malaysia Berhad
Rating Rationale: Alliance Islamic Bank Berhad
Rating Rationale: Alliance Investment Bank Berhad
Ratings on Alliance Bank Malaysia Berhad