This article first appeared in The Edge Malaysia Weekly on February 12, 2024 - February 18, 2024

IT has been just over a year since Alliance Bank Malaysia Bhd embarked on a new strategy of expanding its focus beyond its niche of small and medium enterprises (SMEs) in a bid to accelerate its growth.

To its credit, the lender — the smallest of the country’s eight banking groups by asset size — has made commendable strides despite the numerous challenges in the industry and macroeconomic headwinds globally.

In an interview with The Edge, CEO Kellee Kam says Alliance Bank has made good progress on firing up two other engines that were previously latent, namely the consumer and corporate banking businesses, but admits that there are other areas, such as the fee-income business and Islamic banking business, that still need work.

Its so-called Acceler8 2027 strategy, launched last January, runs over four years until the financial year ending March 31, 2027 (FY2027).

“It is early days, but I think things are going well,” Kam says from his office at Menara Multi-Purpose in Kuala Lumpur.

“If you recall, we were doing very well with the previous strategy of focusing on the SME business. But the whole idea with Acceler8 was to figure out how to broaden it out across other areas of opportunities. And, we’re happy to say that we continue to do very well with SMEs — as at the first half of FY2024, SME loans grew 15% year on year — while consumer loans grew 8.8% [faster than the industry’s loan growth of 5.6%, for the first time since FY2015], mainly from classic mortgages, personal financing and share margin financing.

“We’re also very happy to see that for the first time in a few quarters, we reported positive growth in corporate loans, at 2.5% y-o-y. So, across the board, there was growth, which is kind of a testament to the team getting aligned with the plan, and executing against it.”

On the whole, Alliance Bank saw loans expand 10% y-o-y to RM51.5 billion which was almost double that of the industry.

What is interesting is that it did not sacrifice yields in its mission to grow the loan book. In fact, at a time banks faced margin compression as a result of particularly stiff competition for deposits, Alliance Bank’s net interest margin (NIM), at 2.53% as at 2QFY2024 — up a strong 10 basis points (bps) quarter on quarter, after two straight quarters of declines — is the highest in the industry.

Its CASA (current accounts, savings accounts) deposits ratio, at 44.2% as at 1HFY2024, is among the highest in the industry.

“The whole idea is that when we grow loans, it’s not about dropping rates or increasing the levels of risk. It’s really about getting our people to go on the ground, building relationships and showing actual value. So, if you take a look at NIM, we are the highest in the industry, notwithstanding the fact that we’re growing at the pace that we’re growing,” Kam remarks.

He says the group has increased its headcount, particularly its sales force, to around 4,000 from about 3,600 a year ago.

Notably, Alliance Bank is starting to make headway in growth regions that it had previously underpunched its weight, namely Penang, Johor and East Malaysia. It has opened two new branches — one in Desa Parkcity, Kuala Lumpur, last October and another in Saradise, Kuching, last month — and expects to open a third in Jalan Kelawei, Penang, by the middle of the year, taking its total number of branches to 81.

“We’re slowly building our presence in those regions. Over the 12 months to September 2023, deposits have grown 16% on average across [those] regions, while loans have averaged 14% growth,” Kam shares.

At the same time, the bank is strengthening its digital propositions, particularly on the consumer banking side, striking a chord especially with young professionals in the HENRY — high earners, not rich yet — segment.

“It’s a segment that loves digital products. If you recall, in April last year we launched a first-in-Malaysia — and actually one of the first in Asia — virtual credit card with a dynamic card number. We’ve grown our card base by over 10% and ENR (end net receivables) has expanded by over 20%, so it’s growing pretty rapidly,” he remarks.

Alliance Bank acquired 40% more new-to-bank customers y-o-y in the consumer segment in 1HFY2024, driven by digital and strong growth in the HENRY segment. 

Kam believes that in 3QFY2024, the bank’s NIM is likely to stabilise after having grown strongly q-o-q. He is making no change to its NIM guidance of 2.45% to 2.5% for the full year. The bank’s current view is for Bank Negara Malaysia to stand pat on the overnight policy rate this year. 

The bank is slated to announce its 3QFY2024 earnings later this month.

In 2QFY2024, its net profit stood at RM185.33 million, up by 17% y-o-y and 23.1% q-o-q. This took the first-half earnings to RM335.87 million, a decrease of 9.4% y-o-y, which fell within analysts’ expectations.

“At the halfway mark, the bank is on track to meet all of its guidance for the year, and a sequential drop in gross impaired loans (GIL) was the icing on the cake. We upgrade our stock rating to a ‘buy’ from ‘neutral’, on its above-industry loan growth prospects, improved asset quality outlook and attractive valuation,” RHB Research said in  Dec 1 report last year after the earnings release.

Among its key guidance for FY2024 is achieving a return on equity of over 10% (1HFY2024: 10.1% on an annualised basis) and a net credit cost of 30 to 35bps (1HFY2024: 29.6 bps).

Meanwhile, the recent spate of selling and limit-downs among lower liners in the stock market has had a “minimal” impact on the bank, he says. Its share margin financing business more than doubled y-o-y in 1HFY2024.

“What’s happening in the market has had a minimal impact on us because, for us, we do small amounts but across a lot of people [rather than large amounts over a small number of people]. We don’t really have our own brokerage, so we effectively act as a bank for share margin financing. Our controls are significantly tighter,” he says.

Separately, when asked if recent developments with the bank’s indirect shareholder Ong Beng Seng had any bearing on the bank, Kam responded: “No, it has not affected us at all.” Ong, a Malaysian property tycoon based in Singapore, is currently being investigated by the city state’s anti-graft body in relation to his interactions with former transport minister S Iswaran, who faces corruption charges.

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

The remaining 51% stake in Vertical Theme is held by Langkah Bahagia Sdn Bhd. In April 2016, Ong and two other 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.

The Employees Provident Fund is a substantial shareholder of the bank with a 10.23% stake.

Under Acceler8, areas that need to be doing better include the bank’s fee-income business, particularly trade, Kam says.

The corporate and investment banking businesses also need to be working together more closely, he says. (The investment banking business, previously run by Alliance Investment Bank Bhd, now falls under Alliance Islamic Bank Bhd after the former returned its licence to Bank Negara in December last year).

“That’s not been going as well as I’d [have] hoped at this stage. Our capital market activities are now housed in the Islamic bank. The whole idea is to work closer with our corporate clients, given that a lot of the synergies are with the corporate clients that we already bank. So, although the work has started, the traction that we’d hope to get, to scale up, is still something we need to work on,” Kam says.

He says the Islamic bank has been doing well in terms of asset growth, but its cost of funds has not gotten “to the levels that it needs to be” in order for the business to be a stronger contributor to the group. Recall that Alliance Bank is aiming for the Islamic business to account for 30% of the group’s revenue by FY2027, from 25% in FY2023.

Meanwhile, Kam sees Alliance Bank’s GIL ratio trending down from 2.5% as at end-September last year — higher than the industry average of 1.7% — after having hit a peak of about 2.6% in 1QFY2024.

“The portfolios are actually doing okay at the individual component level. We did have a legacy product — something called Alliance One Account (AOA) — that’s causing us [to have] a little bit higher GILs than that of the normal products we have. AOA is something that has deteriorated a lot faster than the rest.

“I think, at [its] inception, there were many lessons that were yet to be learnt around the credit-decisioning on that product and the controls that needed to be put in place. But that portfolio is something that we stopped in 2021, so a lot of this is just legacy stuff that’s now just coming on the book,” he says.

Asset quality of the SME portfolio is better than the industry’s, he says.

“The SME industry’s GIL ratio was at 3.1% as at September 2023, and we are at 1.7% and trending down. So, where we have seen our GIL higher than industry, really, is the mortgage book, through the AOA product, and one lumpy-but-fully-provisioned-for corporate account. If you strip out these two, our group GIL ratio is in line with the industry.” 

On the whole, though, Kam is happy with the group’s progress on Acceler8. “From a revenue perspective, we are getting to new highs for the group,” he says. The bank’s revenue stood at a quarterly record of RM528.1 million in 2QFY2024.

Interestingly though, Alliance Bank’s share price has not increased as much as other banks over the last 12 months despite its solid earnings growth and consistent dividend payouts — a point not missed by Kam. 

He says it may be partly because foreign investor participation in the market is not as strong in the past. Analysts note that, historically, the bank’s foreign investor shareholding level is relatively higher than that of most banks.

“It is about [showing] consistency. If we can stay consistent with our messaging, with our performance, hopefully the market will start to believe that we’ve truly turned around and that we’ll continue to grow,” Kam says.

The stock has gained 6.6% over the last year to close at RM3.47 on Feb 7, for a market capitalisation of RM5.37 billion. It trades at a price-to-book value of about 0.78 times compared with the sector’s 0.9 times.

Bloomberg data shows that 10 analysts have a “buy” call on the stock while four have a “hold”, with the average 12-month target price at RM3.94. There were no sells.

“Despite the improvements in its loan growth, we maintain our ‘hold’ call as, compared to other local banks, Alliance Bank has a relatively smaller management overlay to shield it from any increases in loan loss provisions (or for further write-backs),” CGS-CIMB Research says in a Nov 30 report. The bank’s management overlay stood at RM208 million as end-September last year.

Meanwhile, the group is on track with a plan to move its headquarters to an office tower which it is buying from Oxley Holdings Ltd for RM405.84 million, at the end of 2025.   According to Kam, its lease at Menara Multi-Purpose – the owner of which is the Malaysian Chinese Association - has been extended for two years until end-2025.

“We’ve received approval to name[the new building] Menara Alliance Bank. That’s something that will hopefully provide more of a sense of belonging to team Alliance,” he says. 

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