Should You Invest In Alliance Bank Malaysia Bhd?

On 21 December 2018, Alliance Bank Malaysia Bhd (ABM) is trading at RM 3.98 a share, some 30% lower than its peak price of RM 5.70 a share in mid-2013.

Source: Google Finance

In this article, I’ll revisit its fundamentals and evaluate its investment potential with a handful of valuation tools. With it, it would answer, whether or not:

  1. Is this a good time to buy ABM?
  2. Should an investment in ABM be dismissed?
  3. Should I hold onto or sell off my existing shareholders of ABM?

#1: Asset Quality

ABM has grown its portfolio of gross loans, advances and financing (LAF) assets by CAGR of 8.4%, up from RM 19.6 billion in 2009 to RM 40.3 billion in 2018. In that period, ABM has improved its asset quality with the gross loan impairment ratio (GLIR) of its LAF assets has dropped from 4.5% in 2009 to 1.4% in 2018. As such, ABM has grown in net interest income, up from RM 654.6 million in 2009 to RM 892.5 million in 2018.

Source: ABM’s Annual Reports

#2: Other Main Income

Apart from net interest income, ABM derives income from Islamic Banking and fees & commission income such as card-related activities, commission and fees from providing brokerage, guarantee, and processing activities. For the past 10 years, ABM has achieved steady increase in fees & commission income. During the period, ABM has derived flat income Islamic Banking operations at RM 200 – 250 million from 2010 to 2014. Since 2014, ABM’s Islamic Banking operations had generated increasing income from RM 210.9 million to RM 318.2 million in 2018.

Source: ABM’s Annual Reports

#3: Long-Term Profitability

As a result, ABM has generated stable growth in operating revenue for the past 10 years, up from RM 1.05 billion in 2009 to RM 1.57 billion in 2018. During the period, ABM has kept its Cost-to-Income Ratio at around 50% and had incurred higher impairment losses on its LAF Assets from 2014 to 2018. As a result, ABM has recorded a gradual decline in shareholders’ earnings from RM 563.5 million in 2014 to RM 493.2 million in 2018.

Source: ABM’s Annual Reports

#4: Latest Financial Results

From a shorter view, I learnt that ABM has increased its operating revenues on a gradual basis from RM 300 million per quarter to RM 400 million per quarter. From it, its quarterly earnings have maintained fairly stable at around RM 100 – 150 million over the last 6 – 7 years. For the past 12 months, ABM has brought in RM 1.59 billion in operating revenues and RM 512.3 million in shareholders’ earnings or RM 0.33 in earnings per share (EPS).

Figures in RM ‘000 unless stated otherwise

PeriodQ3 2018Q4 2018Q1 2019Q2 2019Total
EPS (Sen)7.927.298.818.8733.1

Source: ABM’s Quarterly Reports

#5: Balance Sheet Strength

As at 30 September 2018, ABM has total capital ratio (TCR) of 18.4%, liquidity coverage ratio (LCR) of 167.7% and loan loss coverage of 114.9%. These ratios indicate that ABM has healthy capital levels which enable ABM to be resilient as it withstands any potential economic crisis when it arises and be supportive of its business growth in the future.

#6: Future Prospects

Looking forward, ABM is focusing on several key areas for growth. They include SME Banking, Alliance One Account (AOA), and Alliance@Work.

(1) SME Banking:

ABM targets to achieve loan balances of RM 9.4 billion by Q4 2019. At 1H 2019, ABM has disbursed RM 1.1 billion in loans in this segment and had provided an update where it revised its targets to achieve RM 8.7 billion in loan balances at the end of financial year (FY) 2019.

(2) AOA:

AOA is a mortgage refinancing service introduced by ABM. The management is targeting to increase loans from this segment to RM 4.2 billion by FY 2019. The management has disbursed loans amounting to RM 1.2 billion in 1H 2019, thus, increasing its loan balances from RM 1.0 billion in March 2018 to RM 2.1 billion in September 2018. ABM has revised its targets to achieve RM 3.7 billion worth of loans from AOA by FY 2019.

(3) Alliance@Work:

Alliance@Work provides on-site banking services to corporate clients. ABM has set targets to open >20,000 CASA and >1,000 new company payroll accounts. It has opened >12,000 CASA and >490 new company payroll accounts to-date, on track to achieving its target set for 2019.

#7: Relationship between ABM’s Profits & Stock Price Performance

Evidently, ABM’s stock price movements has mirrored its financial results. The bank has achieved growth in stock price from 2009 to 2013. It was in line with its growth in profits during the period. However, ABM has recorded a marginal dip in profits since 2013. It has caused a fall in stock price from 2014 to 2018.

Source: Google Finance

Source: ABM’s Annual Reports

#8: Stock Valuation

Based on its stock price of RM 3.98,

(1) P/E Ratio:

At Point 4, I have calculated that ABM had made RM 0.331 in EPS. Thus, its P/E Ratio is 12.02, marginally lower than its 10-Year P/E Ratio Average of 12.57.

Key Statistics (21 December 2018):

10-Year P/E Ratio Range: 11.34 – 13.76

10-Year P/E Ratio Average: 12.57

Current P/E Ratio: 12.02

(2) P/B Ratio:  

As at 30 September 2018, ABM has net assets a share of RM 3.59. Thus, its P/B Ratio is 1.11, below its 10-Year P/B Ratio Average of 1.44.

Key Statistics (21 December 2018):

10-Year P/B Ratio Range: 0.99 – 1.65

10-Year P/B Ratio Average: 1.44

Current P/B Ratio: 1.11

(3) Dividend Yield:

In 2018, ABM has paid out RM 0.153 in dividends per share (DPS). If it is able to maintain its DPS at RM 0.153, its gross dividend yield is 3.84%. It is higher than its 10-Year Average of 3.26%.

Key Statistics (21 December 2018):

10-Year Dividend Yield Range: 2.21% – 3.92%

10-Year Dividend Yield Average: 3.26%

Current Dividend Yield: 3.84%

VIA’s Verdict

When compared to Singapore-listed banks, ABM had fallen short in regards to its earnings growth as it reported slight declines since 2014. If we look at their valuation, ABM has similar valuation figures with OCBC, UOB, and DBS.

P/E Ratio10.3510.4111.2012.02
P/B Ratio1.201.041.381.11
Dividend Yield3.29%3.86%4.97%3.84%

So, what is your verdict? Please leave your comments below:

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