Investment Highlight

• We downgrade our recommendation on Alliance Bank Malaysia (ABMB) to HOLD from BUY with a lower fair value of RM3.40/share from RM4.60/share. Our fair value is supported by a lower FY20 ROE of 8.0% (previously 9.9%), pegging the stock to a P/BV of 0.9x. We trim our FY20/21/22 earnings by 18.8%/5.2%/4.4% to RM465mil/RM615mil/RM693mil. This is to account for higher credit cost and CI ratio assumptions. In addition, we have also factored in impairment losses on financial investments of RM49mil for FY20 as well as another OPR cut of 25bps in 2H2019.

• The group reported a lower net profit of RM77mil in 1Q20 (-31.4% QoQ; -43.8% YoY). On a YoY basis, the decline in earnings was contributed by lower non-interest income (NOII), higher operating expenses and an increase in provisions. 1Q20 saw the group recording higher net provisions of RM59mil mainly from the impairment of 3 large corporate accounts and provisioning of RM49mil for losses on financial investments/bonds which were related to one of the 3 impaired loans.

• 1Q20 earnings were below expectations, making up only 13.4% of our and 13.2% of consensus estimates largely due to the higher provisions.

• Operating expenses (opex) rose 8.1%YoY in 1Q20 due to investments in IT infrastructure and transformation sales force. These have resulted in a higher CI ratio of 48.7% for 1Q20 (1Q19: 45.7%). 1Q20 JAW was a negative 6.6%.

• Gross loans grew 5.5%YoY driven largely by SME, AOA and personal loans.

• YTD saw the group's NIM declining by 10bps to 2.40% impacted by the OPR cut of 25bps in May 2019.

• The group’s GIL ratio rose to 1.30% form 1.12% in the preceding quarter with upticks in impaired loans of RM77.9mil or 16.4% QoQ. Annualised credit cost based only on loans for 1Q20 rose to 0.52% (1Q19 and 4Q19: both 0.37%) and was higher than our estimate of 0.33% for FY20. We are now expecting a credit cost of 0.38% for FY20.

• No dividends have been declared in 1Q20.

• Capital ratios remained healthy with a group CET1 ratio of 13.5%.

Source: AmInvest Research - 28 Aug 2019