This article first appeared in The Edge Malaysia Weekly on February 6, 2023 - February 12, 2023

THE office of Alliance Bank Malaysia Bhd’s new CEO, Kellee Kam, on the seventh floor of its headquarters at Menara Multi-Purpose in downtown Kuala Lumpur, looks out to myriad small to medium enterprises (SMEs), from cafés to retailers — a constant reminder of the business segment in which the lender has carved a strong niche for itself.

For years, the country’s smallest of eight local banking groups by asset size has centred its growth on its SME business. Under Kam’s leadership, however, that approach is about to be modified.

In a bid to accelerate its growth, Kam, who got into the driver’s seat last September, wants to broaden Alliance Bank’s focus and expand into new areas beyond SMEs.

In an exclusive interview with The Edge, his first since taking the helm, Kam talks at length and candidly about the bank’s new strategy — known internally as ACCELER8 2027 — which will run for four years until the financial year ending March 31, 2027 (FY2027).

Kam, who turns 50 this year, is well known in the industry, having been group managing director of the RHB banking group from 2011 to 2015. He most recently served as chairman of Bank of America Malaysia Bhd for about a year.

He takes over the reins from Joel Kornreich, whose tenure at Alliance Bank ended after a run of more than seven years.

“When we went out in the market as Alliance Bank in 2017, we talked about wanting to be ‘the preferred bank of business owners’. The mindset was very much focused on the SME market and we’ve done that [business] very, very well. We have taken our market share in SME loans up, from 3.4% in FY2018, to 5% in FY2022. Today, we’re about 5%. So it’s not just talk, we delivered,” Kam says.

Indeed, between FY2018 and FY2022, the bank’s SME loans expanded at a compound annual growth rate (CAGR) of 10.8% — more than four times the industry’s 2.5%. According to Maybank Investment Bank Research, SME loans accounted for a hefty 34% of Alliance Bank’s total loan portfolio of RM46.77 billion as at end-September 2022, compared with a peer average of 16%.

“It’s something that we were growing very quickly in. But, if you then take a look at our consumer business, it was growing at a very low single-digit pace, below industry. So, clearly, while we were so focused on delivering in the SME business, we were losing opportunities in the consumer space,” Kam says.

“We were also under-delivering opportunities in [certain geographical areas in Malaysia]. The majority of our business today lies in the central region — so, within KL and greater KL. But then we benchmarked where [our branches] are against where the nation is growing, and saw that we are missing out pockets of opportunities in different economic corridors. We’re talking about Penang, the eastern states [of Sabah and Sarawak] and parts of Johor, where we are under-punching our own network.”

As a result, the bank’s overall market share, in terms of assets, fell marginally from 2.5% in FY2018 to 2.4% in FY2022.

Kam says: “As a team, we sat down and asked ourselves: If we don’t do anything and just continue on the same path, how will we look five years from now, in 2027? We’re going to be losing market share continuously and end up in a situation where we have to ask ourselves: What role do we play in this market?

“So, all of us just said, ‘No, we don’t want to be known as a team that loses market share; we want to reverse this trajectory and make ourselves a more relevant feature in the industry beyond just SME.’”

Hence the shift in the bank’s strategy, which, interestingly, comes at a time when rival banks are gunning for growth in their SME business. SMEs have a relatively riskier profile but yield better margins for banks.

Alliance Bank’s new strategy is focused on eight pillars that it sees as its key growth opportunities over the next four financial years (see chart).

They include broadening its consumer business, becoming a “champion” in selected economic corridors such as Penang and East Malaysia, and accelerating its Islamic business.

Kam says a main area of focus in consumer banking is to grow the mortgage business at an above-industry pace. “Mortgages are not something we’ve traditionally [focused on]. In fact, in the last two years, we grew the business at less than 1.8%. So, you will see that growing, you’ll see us revitalising our branch network — turning branches into not just service centres but sales and service centres.”

It currently has 79 branches and may add new ones, if necessary, in Penang, Sabah and Sarawak.

The bank will also target two new segments in the consumer banking space — young professionals, whom it refers to as HENRYs (high earners, not rich yet), as well as high-net-worth individuals.

“A HENRY could be someone with accounting qualifications who comes into the workforce, has a decent salary but is technically not rich yet and still struggling to climb the ladder. We understand their growth path, so the idea here is to capture the opportunities and ‘feed’ them as they grow up and move into the other segment that we’ll be targeting a lot more, which is the high-net-worth,” says Kam. HENRYs typically earn between RM3,000 and RM8,000 a month, he says.

Wealth management will be another area of focus. “There’s a fair amount of opportunity for us to work very well with our high-net-worth customers today, but it’s very much central region-driven, so we need to expand this to other regions and provide more product opportunities,” Kam says.

Alliance Bank is in the process of winding down its investment bank, Alliance Investment Bank Bhd (AIBB), which sold its stockbroking business to Phillip Capital Sdn Bhd last July in a group reorganisation.

The bank has since transferred AIBB’s capital markets business to its Islamic banking subsidiary, Alliance Islamic Bank Bhd. “One of our pillars [under ACCELER8 2027] is to bring corporate business and capital markets business together. We want to make better use of our investment banking capabilities, which will now be delivered through the Islamic bank,” Kam says.

Kam makes it clear that although Alliance Bank is tapping other areas for growth, the SME business remains important. He sees it as continuing to be the bank’s largest growth driver.

“We don’t want to take our foot off the SME growth engine. The idea is to maintain growth at 11% to 12% [over the next four years],” he says.

From a market share perspective, the bank aims to be among the top 6 players by FY2027. It is currently ranked eighth.

The current top three players in the SME business, given their sheer size, are Public Bank Bhd, Malayan Banking Bhd and CIMB Group Holdings Bhd.

Meanwhile, key financial targets that Alliance Bank hopes to achieve by FY2027 include return on equity (ROE) of above 11% (putting it in the top quartile); cost-to-income ratio (CIR) of 45%; and a dividend policy payout ratio maintained at 50%. It also plans to grow loans at an above-industry pace of 8% to 10% over the next four years.

Kam is aiming for the group’s Islamic business to account for 30% of the group’s earnings by FY2027, from 22% in FY2022.

While analysts see the ROE target as being within the bank’s reach — it already hit an annualised ROE of 11.5% in the first half if its current financial year (1HFY2023) — they think it will be tougher for it to meet the loan growth target, given the weaker economic outlook.

In a Jan 11 report, CGS-CIMB Research says: “We deem [it] challenging, as this is significantly higher than the normalised growth of 4% to 5% for the industry and one of the strongest in the sector. Our projected loan growth for Alliance Bank is more conservative at 6% to 7% for FY2023 to FY2024, and 5.5% for FY2025, which is considered an improvement from 4.6% in FY2022.”

Nonetheless, Kam thinks the target is attainable, given that it will be firing up two other engines — the consumer and corporate businesses — while maintaining the velocity of the SME business. He is also not as pessimistic about the economic outlook as many others.

In 1HFY2023, Alliance Bank reported a net profit of RM370.6 million, which represented a year-on-year increase of 16.3%. This was on the back of a 2% rise in revenue to RM954.6 million.

The bank made one of the heaviest pre-emptive provisions in the industry during the Covid-19 pandemic, which took a toll on its earnings. Net profit, which fell 21% y-o-y to RM424.26 million in FY2020, declined further to RM358.79 million in FY2021 before rebounding to RM572.82 million in FY2022.

“From a provisioning standpoint, the overlays within Alliance Bank are pretty healthy. We are at 133%, 135%, loan loss cover. So, if you look at it from that perspective, I’m comfortable with where we’re at, but not [to the extent] that I would say, ‘Let’s write it all back,’” says Kam.

Going forward, any writeback in provisions will be done at a “measured” pace, he adds.

The bank’s gross impaired loan ratio, an indicator of asset quality, has trended downwards to 1.8% as at 1HFY2023 from 2.3% in FY2021. The GIL in its SME book is lower than that, at 1.1% compared with 1.2% in FY2021.

As at end-September last year, loans under repayment assistance stood at RM1.97 billion, representing 4.2% of the bank’s total loan book. All its customers under moratoria have transitioned out.

Under its ACCELER8 2027 plan, Alliance Bank will grow organically, rather than through mergers and acquisitions. Kam says the bank recognises that it is small and not “a bank for the masses”, but it sees itself as a “challenger”. For perspective, the lender has a modest asset size of RM63.7 billion compared to a mid-sized lender such as RHB Bank Bhd, which has RM306.4 billion.

“Being a smaller bank with fewer resources, we are very focused on the areas in which we want to deploy them. We may not have absolute large market shares nationwide, but nothing stops us from having absolute large market shares [in certain geographic areas]. That’s the kind of mindset we have when it comes to competitors,” Kam says.

It will also continue with its digital initiatives — almost 75% of its customer banking transactions are done through its digital channels — and invest further in technolo­gy over the next few years.

“We’ve earmarked about RM180 million just for technology under Acceler8 2027. We will prioritise IT investments that generate faster revenue,” Kam says. This is on top of the bank’s usual IT expense of around RM60 million on average a year.

As with other banks,the road ahead for Alliance Bank will be challenging. Investors are watching closely to see whether its new strategy will deliver the desired results. Last year, the bank’s share price gained 36.6%, among the best of the domestic banking groups.

Kam says: “When we talked to some analysts, they said [our new strategy] sounded very basic. We’re not here to be so complicated that it looks nice to everyone else, but execution is very patchy. The mindset for us is: simple messaging, execute against delivering real value, execute it well. That’s it.”

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