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RAM Ratings reaffirms A1 ratings of Alliance Bank and its banking entities

Published on 27 Nov 2020.

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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.

Table 1: Ratings of entities under Alliance Bank

 

Ratings

Alliance Bank Malaysia Berhad

 

i.

Financial Institution Ratings

A1/Stable/P1

ii.

RM500 million Commercial Papers Programme (2015/2022)

P1

iii.

RM1.5 billion Senior Medium-Term Notes Programme (2015/2045)

A1/Stable

iv.

RM2.0 billion Subordinated Medium-Term Notes Programme (2015/2045)

A2/Stable

v.

RM1.0 billion Additional Tier-1 Capital Securities Programme (2017/-)

BBB1/Stable

Alliance Islamic Bank Berhad

 

i.

Financial Institution Ratings

A1/Stable/P1

ii.

RM300 million Islamic Commercial Papers Programme (2019/2026)

P1

iii.

RM2.5 billion Perpetual Sukuk Programme (2019/-):

  • RM1.2 billion Senior Sukuk Murabahah
  • RM800 million Tier-2 Sukuk Murabahah
  • RM500 million Additional Tier-1 Capital Sukuk Wakalah

 

A1/Stable

A2/Stable

BBB1/Stable

Alliance Investment Bank Berhad

 

i.

Financial Institution Ratings

A1/Stable/P1

 

Analytical contact
Chan Yin Huei
(603) 3385 2498
yinhuei@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2020 by RAM Rating Services Berhad



Rating Rationale: Alliance Bank Malaysia Berhad

Rating Rationale: Alliance Islamic Bank Berhad

Rating Rationale: Alliance Investment Bank Berhad

Ratings on Alliance Bank Malaysia Berhad

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