Investment Highlight

• We maintain our HOLD recommendation on Alliance Bank Malaysia (ABMB) with a lower fair value of RM2.60/share from RM2.80/share. We are rolling over our valuation to FY21. Our revised fair value is based on an FY21 ROE of 8.5%, pegging the stock to a lower P/BV of 0.7x. We cut our FY21/22 earnings by 9.8%/2.7% to account for higher credit cost assumptions and another OPR cut of 25bps in 1H2020 in addition to the 25bps interest rate reduction on Jan 2020.

• The group reported an improved net profit of RM134mil in 3Q20 (+16.0% QoQ) due to lower provisions from mortgage loans including Alliance One Account (AOA) and recoveries from two legacy corporate loans. The inflow of newly impaired AOA and conventional mortgage loans are still rising in 3Q20 but the increase was lower compared to 2Q20.

• 9M20 earnings fell by 23.4% YoY to RM326mil largely due to lower net interest income (NOII) from the 25bps OPR cut on May 2019 and higher provisions. Nevertheless, these were partially offset by an increase in NOII from stronger treasury and investment income, wealth management and banking services fees. Cumulative earnings within expectations, making up 77.8% of our and 71.5% of street estimates.

• Opex rose 6.3% YoY in 9M20 due to investments in IT infrastructure and higher personal cost. As result, CI ratio climbed to 48.2% for 9M20, in line with our estimate. Management is maintaining its CI ratio guidance of 48.0% for FY20. 9M20 JAW was a negative 2.9%.

• Gross loans decelerated to 5.2% YoY, but still outpacing the industry’s growth of 3.9% YoY. Loan growth is likely to taper further to 5.0% YoY in the 4Q20.

• YTD saw the group's NIM declined by 12bps to 2.38% impacted by the OPR cut of 25bps in May 19 and lower delinquency pricing. We see further downsizing risk on the group’s net interest income and NIM for potentially another rate cut of 25bps in 1H2020 in addition to the 25bps cut in OPR on Jan 2020. Nevertheless, we expect gains on the AFS book from the further declining in yields to mitigate some of the OPR cut’s impact this year.

• The group’s GIL ratio rose to 1.86% in 3Q20 from 1.66% in 2Q20 due to further upticks in impairment of conventional mortgage and AOA even though the inflows of new impaired accounts have tapered QoQ.

• Annualised credit cost based only on loans for 2Q20 rose to 0.70% from 0.52% in 1Q20. For 6M20, credit cost for loans was 0.62% annualised.

• No dividends have been announced in the 3Q20.

Source: AmInvest Research - 2 Mar 2020