PETALING JAYA: The recovery of small businesses amid a pick-up in the economy will lend strength to Alliance Bank Malaysia Bhd in the coming year.
With demand for most things set to increase in line with a recovering labour market, small and medium enterprises (SMEs) ought to see better revenues and enhanced capabilities to expand.
As such, banks with sizeable SME portfolios are primed to benefit, as business loan demand improves on reinvigorated working capital needs.
In a report, Kenanga Research noted that Alliance had a high exposure to the SME segment, which constituted more than 30% of its books. This bodes well for the bank.
“Expansionary-driven demand could materialise if the business landscape turns more favourable than expected,” it said.
Alliance aspires to be among the top-four players in the SME space.
Additionally, the bank’s growth potential will be supported by rising household loans as income prospects become more sustainable in the second half of this year (H2).
At present, Kenanga’s financial year 2023 (FY23) loan growth projection stands at 5%, in line with its 2022 industry-wide expectation.
The brokerage highlighted that credit cost would be lumpier in H2 of FY22. Previously, the group had updated its FY22 credit cost target from below 90 basis points (bps) to less than 75bps on the back of H1 of FY22 annualised credit cost of below 60bps.
“Management is still keeping a prudent eye on certain high-risk accounts in its targeted repayment assistance (TRA) books, which may call for further provisioning.
“In the meantime, management shared that its Alliance One Accounts made up 20% (or RM5bil) of its consumer books, which it is comfortable with at the moment as the current economic landscape should improve the quality of these accounts,” Kenanga said.
The research house has an “outperform” recommendation on Alliance with a higher target price of RM3.60 from RM3.25 previously, given its strong economic recovery angle and the group’s comparable medium-term fundamentals to some of its larger-cap peers.
However, other analysts are less optimistic about the bank.
Hong Leong Investment Bank Research (HLIB) cut its “buy” call on the stock to a “hold”, while CGS-CIMB downgraded its rating to “reduce” from “hold” previously.
According to HLIB, the bank has a relatively soft return on equity trend – one percentage point lower versus the pre-pandemic level and sector mean.
“The strong share price performance over the past one year may cap returns going forward and valuations are near to mean, indicating easy money has already been made. Thus, we are now less bullish on the stock,” HLIB said.
It noted, however, that Alliance will continue to chalk up a better grade at its next environmental, social and governance (ESG) banking review, which should augur well for the stock. The bank had presented its inaugural sustainability strategy plans on Jan 19.
CGS-CIMB said Alliance’s ESG adoption progress included the introduction of a list of business activities that it will not finance as well as its Risk Acceptance Criteria, which will guide the bank’s lending practices.
“These will lay the foundation for the full integration of ESG evaluation with all its major decision-making processes in the future.
“Alliance is targeting a total sustainable financing of RM5bil by FY25. We think that this is achievable, on our estimated asset size of RM87bil for Alliance in FY25 and the broadscope of classification for sustainable financing, which includes loans, fixed income investments and corporate advisory business,” it said.
While this marks a good milestone, the research house noted that there is limited scope for further expansion in Alliance’s price-earnings valuation from the current level. It has a target price of RM2.73 on the stock.