Investment Highlight

• We maintain our BUY recommendation on Alliance Bank Malaysia (ABMB) with a higher fair value of RM5.15/share (from RM5.00/share) as we roll over our valuation to FY20. Our fair value is supported by an FY20 ROE of 10.5%, pegging the stock to a P/BV of 1.3x. We tweak our net profit estimates for FY20 by -1.0% by factoring in a higher NIM compression.

• Alliance One Account (AOA) and SME, both higher risk adjusted return (RAR) loans, will remain the key drivers for ABMB’s net interest income (NII). For FY20, the group’s revenue growth will largely continue to hinge on NII. Meanwhile, NOII is only projected to grow modestly as market volatility persists. Challenges remain on the group’s treasury and wealth management income.

• AOA, comprising loans with ODs, is largely aimed at refinancing borrowers’ credit facilities from other financial institutions. Despite a strong focus to drive AOA growth aggressively, we are comforted by the security coverage of the AOA financing with a maximum loan-to-value (LTV) ratio of 90.0%. Also, a debt serving ratio (DSR) limit of 60.0% has been imposed. We gather that the target for the financing are existing customers with good credit profiles.

• The group has simplified the processing of applications and has launched a new loan origination system for SME loans to improve customers’ experience. Coupled with the availability of CGC programme, express loans to meet borrowers’ short-term gaps in working capital requirements and initiatives to support businesses, the group remains focused on driving the higher yielding SME loans. We understand that retail, services and manufacturing are the key sectors targeted. On a comforting note, the average collateral coverage for SME loans is circa 80.0%.

• The group has not been active in recent FD campaigns unlike its peers. Recall in 3QFY19, growth of its customer-based funding of 6.1%YoY was on par with loans. In contrast, most of its competitors have recorded faster growth in deposits than in financing. In FY20, the group is expected to be more aggressive in deposit growth. Acceleration of funding will be to support the expansion of assets and reduce its present LD ratio of 96.8% to circa 90.0%. This is expected to increase their funding cost and unless base rate (BR) is raised, a much higher compression in NIM in FY20 is likely to occur.

In anticipation of this, we expect the group to increase its BR soon to mitigate the funding cost pressure, in line with its competitors. Recently, Hong Leong Bank raised its BR by 10bps in Jan 2019 while CIMB and BIMB increased their rates by 10bps and 13bps in Dec and Nov 2018 respectively.

• Despite industry expectations that steer more towards a 25bps reduction in the OPR, the group is expecting the benchmark interest rate to stay at 3.25%. The group has a high percentage of floating rate loans compared with its peers at 89.9%, which is close to BIMB Holding’s 91.0%. Hence, any adjustments in the OPR will affect both AMBM and BIMB the most. Based on our analysis, should a 25bps OPR cut occur in 2H19, the group’s FY20 net profit will be lowered by 3.0%.

• Despite efforts to increase CASA balances through Alliance@Work and Alliance Saveplus, YTD (up until Dec 2018), CASA deposits growth was flat at 1.3%. The slow CASA growth is expected to persist in the near term. Challenges to grow CASA growth were similar with that experienced by the industry which recorded a corresponding YTD expansion of only 1.9%.

• The group’s GIL ratio trended lower to 1.28%, better than the industry’s 1.5%. Nevertheless, we are projecting an uptick in GIL ratio to 1.5% for FY20. The group’s credit cost for 9MFY19 was 0.29% (9MFY18: 0.19%). We maintain our credit cost assumption of 0.36% in FY19 and a slight uptick to 0.38% for FY20.

• We understand that there is some stress on the asset quality of SME loans but there is nothing alarming as of now. The group’s exposure to real estate loans has been reduced 14.0% or circa RM1.4bil in Dec 2018 from 20.0% in Dec 2017. Meanwhile, corporate and commercial loans registered an uptick in GIL ratio in 3QFY19 due to the impairment of one construction loan of circa RM100mil. Some provisions have been made for the impaired loan. Since it is a government-related project where the contractor’s completed works were not up to the required specifications, we opine that the risk of full provisions for loan impairment is lower than private projects.

Source: AmInvest Research - 4 Apr 2019