Highlights
-In 1Q25 ended 30 June 2024, both revenue and net interest income rose 16% yoy to RM540 million and RM465 million, driven by healthy NIM and continued expansion of Alliance’s loan portfolio.
- Alliance maintains the highest NIM (2.45%) in town, outperforming peers like Maybank (2.02%), Public Bank (2.20%) and CIMB Bank (2.22%). Furthermore, gross loans have increased by 14.8% yoy.
- Alliance remains well-capitalised with CET1 ratio of 12.2% and total capital ratio of 16.4% as of June 2024, exceeding Bank Negara Malaysia and the capital trigger event threshold.
- The bank plans to issue AT1 bonds callable in 5 years at an IPG of 4.65% and/or 7 year at 4.85%, with a BBB1 rating from RAM.
- We opine Alliance bank is a prudently managed financial institution, characterised by healthy capital ratios and generally sound credit management.
- However, given the inherently risky nature of AT1 securities, we would only recommend aggressive investors who understand the mechanism of AT1 to subscribe to the bond.
Introduction
Alliance bank is one of the listed banking institutions in Malaysia, with a market capitalisation of RM 6.67 billion as of 2 September 2024. The group is essentially established on 2001 following the major merger of seven financial institutions. Over the years, the group has steadily grown its loan book, from RM40 billion in 1Q18 to the latest RM 57 billion in 1Q25 ended 30 June 2024.
**FY25 covers the period from 1 April 2024 to 31 March 2025**
Steadily climbing revenue
The group has delivered steadily climbing revenue over the years, mainly driven by the growth in net interest income. This is evidenced in 1Q25 where both revenue and net interest income rose by 16% yoy to RM540 million and RM465 million respectively. This is made possible by its healthy net interest margin (NIM) and the continued expansion of Alliance’s loan portfolio.
Chart 1: Alliance’s income breakdown and net interest margin (financial year is ended in March)
Although the NIM has declined slightly to 2.45% in 1Q25, Alliance still maintains the highest NIM in town. Furthermore, gross loans have increased by 14.8% year-on-year.
Chart 2: Latest net interest margin among banks
Alliance also boasts one of the highest CASA (Current Account and Savings Account) ratios in the banking industry, with a ratio of 41.9% in 1Q25. This strong CASA ratio contributes to overall lower funding costs, further supporting the bank's net interest margin.
Fair cost to income ratio
Cost to income ratio (CIR), which measures the efficiency of spending to generate each unit of income, stood at 48.0% in 1Q24. This came higher than the previous few years due to increased headcount and outlay on IT expenses. Nonetheless, it is still fair as bank peers like Maybank and CIMB Bank are also recording CIR at similar range. Public Bank is the outlier when it comes to this ratio, where it is renowned for having low CIR.
Chart 3: Latest cost to income ratio among banks
Generally sound credit management
With the expanding loan volume, monitoring the asset quality (approved loan) of Alliance is crucial. As of 30 June 2024, Alliance’s gross impaired loans ratio stood at 2.1%. This is relatively higher compared to peers like Maybank at 1.3%, Public Bank at 0.6% and CIMB at 2.5%. On the other hand, the group’s loan loss coverage came in at 111.6% when the loan loss coverage for the banking industry is around 91%, suggesting that Alliance maintains a bigger loan loss reserves to absorb potential loan losses.
Table 1: Alliance bank’s asset quality ratios
FY21 | FY22 | FY23 | FY24 | 1QFY24 | 1QFY25 | |
Loan loss coverage | 105.9% | 141.5% | 123.7% | 113.80% | 120.0% | 111.6% |
Gross impaired loans ratio | 2.3% | 1.9% | 2.5% | 2.1% | 2.6% | 2.1% |
Source: Company report, iFAST compilations. Data as of 30 August 2024. | ||||||
This presents a mixed picture. While Alliance has a higher proportion of impaired loans comparatively, it also has bigger loan loss reserves in place. Coupled with the fact that Alliance does have room to account for more provisions in its income statement, we are not overly worried about its asset quality.
Capital adequacy and liquidity ratio remain well above minimum regulatory requirement
In terms of capital adequacy, Alliance remains well-capitalised with CET1 ratio of 12.2% and total capital ratio of 16.4% as of June 2024. This comfortably surpasses the minimum capital adequacy framework set by Bank Negara Malaysia and the capital trigger event threshold (CET1 ratio: 5.125%, tier 1 capital ratio: 6.0%, total capital ratio: 8.0%). Alliance is also not in the domestic systemically important bank (D-SIB) list, which discharge the bank from higher loss absorbency (HLA) requirement. Altogether, the group have a supportive capital ratio to help withstand any unexpected losses.
Table 2: Alliance’s capital adequacy ratio
| As of June 2024 | Minimum requirement (BNM framework & capital trigger event) |
CET1 ratio | 12.2% | 5.125% |
Tier 1 capital ratio | 12.9% | 6.0% |
Total capital ratio | 16.4% | 8.0% |
Source: Company report, BNM, iFAST compilations. Data as of 2 September 2024. | ||
Liquidity coverage ratio also remains sturdy at 163.0% (min requirement: 100%), ensuring Alliance has sufficient liquid assets on balance sheets to meet short-term obligations.
Outlook on Alliance Bank
Looking ahead, the Acceler8 strategy devised by the group will help in driving the bank's growth. Some of the initiatives include expanding its branch network and upgrading its IT infrastructure to deliver more personalised experiences. This has resulted in 40% of new customers being acquired through digital channels in FY24.
Additionally, the group has made significant strides in key economic growth corridors like Penang and Sarawak, achieving a 48% yoy increase in deposits and 18% growth in loans in FY24. In FY25, Johor will also become a key focus alongside strengthening presence in Sabah. With these initiatives, we expect Alliance Bank to continue its steady business growth.
Risky nature of AT1
AT1 is a high-risk security designed to absorb losses when a bank faces financial distress, particularly if the bank’s capital levels fall below a specified threshold.
In this scenario, the AT1 will be written off when the CET1 ratio falls below 5.125%, until the point where CET1 ratio is restored to at least 5.75%. On top of that, Bank Negara Malaysia (BNM), Perbadanan Insurans Deposit Malaysia (PIDM), or any federal or state government in Malaysia has the absolute authority to mandate an AT1 write-off if they determine that Alliance Bank would become non-viable without it.
Additionally, banks may elect not to call or redeem an AT1 if, after evaluating their balance sheet, they determine that doing so would not be financially prudent.
Our view
We opine Alliance bank is a prudently managed financial institution, characterised by healthy capital ratios and generally sound credit management. However, given the inherently risky nature of AT1 securities, we would only recommend aggressive investors who understand the mechanism of AT1 to subscribe to the bond.
Alliance bank is looking to issue either AT1 callable in 5 years at IPG of 4.65%, or AT 1 callable in 7 years at IPG of 4.85%, with the final decision to be determined later. The proposed issuance has been rated as BBB1 by RAM.
At the very least, we believe that an IPG of no less than 4.6% for AT1 callable in 5-years and no less than 4.8% for the AT1 callable in 7 years would be a reasonable entry point for aggressive investors.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds a NIL position in the abovementioned securities.
