Investment Highlight

• We maintain our HOLD recommendation on Alliance Bank Malaysia (ABMB) with a lower fair value of RM2.90/share from RM3.40/share. Our revised fair value is based on an FY20 ROE of 7.7% (previously: 8.0%), pegging the stock to a lower P/BV of 0.8x. We trim our FY20/21/22 earnings by 4.9%/9.9%/7.8% to account for higher credit cost assumptions.

• The group reported an improved net profit of RM116mil in 2QFY20 (+50.6% QoQ) due to higher non-interest income (NOII) from a stronger treasury and investment income, coupled with a rise in fee income supported by better wealth management income. 2QFY20 saw lower provisions on financial investments but higher allowances for loan impairments mainly due to a rise in credit cost for Alliance One Account (AOA) predominantly from the pre-June 2018 portfolio, conventional mortgages, personal financing and also SME/Commercial loans.

• 6MFY20 earnings fell by 30.6% YoY to RM192mil largely to due higher provisions despite achieving a higher income of 4.5% YoY from both NII and NOII. Cumulative earnings were below expectations, making up 41.3% of our and 39.2% of street estimates largely due to higher than expected provisions.

• Operating expenses (opex) rose 5.7%YoY in 6MFY20 due to investments in IT infrastructure and higher personal cost. As result, CI ratio climbed to 47.4% for 6M20 (1Q19: 45.7%). 6MFY20 JAW was a negative 1.2%.

• Gross loans grew 5.9% YoY driven largely by SME, AOA and personal loans.

• YTD saw the group's NIM declining by 13bps to 2.37% impacted by the OPR cut of 25bps in May 2019 and lower delinquency pricing which offset the better yields from higher RAR loans.

• The GIL ratio rose to 1.66% from 1.30% in the preceding quarter mainly attributed to upticks in impairment of loans for residential properties (from both conventional mortgage loans pre-2013 and AOA loans mainly from preJune 18 portfolio. Annualised credit cost based only on loans for 2QFY20 rose to 0.70% from 0.52% in 1QFY20. For 6MFY20, credit cost for loans was 0.62% annualised.

• A dividend of 6 sen/share has been declared (payout ratio: 48.0%. This was lower in quantum than the 8.5 sen/share (payout: 48.0%) declared in 2QFY19.

Source: AmInvest Research - 28 Nov 2019