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

ALLIANCE Bank Malaysia Bhd may be small, but there is no reason that it cannot continue to thrive as a standalone bank over the next few years, analysts say.

“That’s why its niche in the small and medium enterprise (SME) market is important, and it should keep nurturing that. It gives the bank a competitive advantage,” says a banking analyst from a local research outfit who declines to be named.

Given that Alliance Bank is the smallest of the country’s eight local banking groups by assets, market observers often wonder whether it may eventually decide to merge with rivals as the banking landscape gets increasingly crowded, tough and competitive. It is seen as a potential takeover target.

Five new digital banks are expected to be launched in Malaysia, some as early as this year, adding to the 26 commercial banks and 17 Islamic banks that are already here.

Alliance Bank’s new CEO Kellee Kam, who joined the group last September, says its roadmap for the next four financial years, known internally as ACCELER8 2027, does not factor in mergers and acquisitions (M&A).

“Our growth will be purely organic,” he tells The Edge in an interview.

Under ACCELER8 2027, the bank wants to broaden its focus and expand into new areas beyond SMEs in a bid to accelerate its growth. It aims to pay more attention to consumer banking and wealth management, while also targeting young professionals who are “high earners, not rich yet” as well as high-net-worth customers.

Another banking analyst, also speaking on condition of anonymity, says: “It’s good for them to diversify into other areas so long as they don’t lose their key focus on the SME segment. That is what has carried them through over the years and it would be quite a shame if they lost that. So, yes, there’s no reason they can’t continue to stand alone, if they have that niche.”

He notes, however, that it is hard for analysts to discount M&A at the bank, given that it has some interesting shareholders.

“Langkah Bahagia [Sdn Bhd] is the one to watch,” he remarks, referring to one of the bank’s indirect shareholders.

Alliance Bank is backed by Singapore’s state-owned investment firm Temasek Holdings. Temasek’s interest in the bank is held through Duxton Investments Pte Ltd, which holds 49% of Vertical Theme Sdn Bhd, which in turn controls 29.06% of Alliance Bank.

The remaining 51% stake in Vertical Theme is held by Langkah Bahagia. In April 2016, Singapore hotelier Ong Beng Seng and two others, who are Malaysians — Richard Ong Tiong Sin, who runs private equity firm RRJ Capital, and corporate adviser Seow Lun Hoo — bought the entire equity interest in Langkah Bahagia from Lutfiah Ismail, an associate of former finance minister Tun Daim Zainuddin.

At the time, analysts said the three who emerged in Langkah Bahagia were believed to be parties friendly to Temasek and, as such, corporate developments down the road could not be discounted.

Apart from Alliance Bank, Temasek is the biggest shareholder of Singapore’s DBS Group Holdings Ltd (29.6%) — the largest bank by assets in Southeast Asia — and UK-based Standard Chartered plc (16.4%).

Interestingly, there has been no M&A attempt by other banks on Alliance Bank and vice versa. “They’re too small for the bigger banks to be interested in. So, if at all, it might be the smaller banks like Affin Bank that may be keen on it,” says one analyst.

For perspective, Alliance Bank had an asset size of RM63.7 billion as at end-September last year compared to the RM306.4 billion of a mid-sized lender such as RHB Bank Bhd. Affin Bank had RM86.7 billion.

Bloomberg data shows that, of 15 analysts that track Alliance Bank, 11 had a “buy” call on the stock and four had a “hold”. Their average 12-month target price for the bank is RM4.22.

The counter, which has gained 12.9% over the last 12 months, closed at RM3.50 last Friday, giving the company a market capitalisation of RM5.4 billion.

CGS-CIMB Research, which has a “hold” call on the stock, says in a recent report: “We are positive on Alliance Bank’s efforts to refresh its strategic plans under the new CEO. In our view, this has added some new dimensions to its strategic focuses (such as supporting businesses’ needs through their lifecycle, targeting young professionals and exploring more collaborations with third parties). We believe the implementation of ACCELER8 2027 will help improve Alliance Bank’s financial performance.

“However, we think it may not be able to realise the full benefits from this transformation programme. [One reason is that] most banks are not resting on their laurels and are embarking on transformation programmes that are focused on similar areas.”

CGS-CIMB points out that there will be several negative developments in the banking industry in the next few years, including a potential downward trend in banks’ net interest margin — albeit not significant — following hikes in the overnight policy rate, owing to deposit competition, weak fee income growth and high cost pressures this year arising from heightened inflation.

All eyes are watching to see whether Kam can surprise investors on the upside.

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