Investment Highlight

• We maintain our HOLD recommendation on Alliance Bank Malaysia (ABMB) with an unchanged fair value of RM1.90/share. Our fair value is based on an FY21 ROE of 7.5%, pegging the stock to a P/BV of 0.5x. We tweak our FY20/21/22 earnings lower by 4.1%/3.4%/10.1% to reflect a higher credit cost of 0.65% for FY20, slower loan growth (FY20: 3.0% and FY21: 2.5%) and lower noninterest income (NOII) by 20.0% for FY21 and FY22.

• ABMB has outstanding loans of RM43.5bil as at the end of 3Q20, and a majority of its borrowers (consumer and SMEs) have opted for the 6-month moratorium to defer repayments from 1 April 2020.

• Although interest will be accrued for 6 months during the moratorium, the group is not concerned about liquidity. This is based on the available cash of RM1.3bil, financial assets of RM11.7bil and the recent release in liquidity of RM466mil from an SRR cut by 100bps to 2.00%, which will be adequate to fund its operational expenses.

• The treatment of HP loans with fixed rates during the moratorium is still uncertain and whether there will be day 1 loss adjustment on 1Q21 is pending further clarity from BNM. We understand that for fixed-rate HP loans which are under the HP Act, the bank requires the consent of borrowers to vary terms and accrue interest for the 6-month period.

• Loans of borrowers’ loans, especially those facing tighter cash flows, could be restructured and rescheduled (R&R) either during or at the end of the moratorium on 1 October 2020. To ease pressure on asset quality, the bank has also approved over RM443mil in financing to relieve the cash flow constraints of businesses. This included RM319mil financing under BNM’s Special Relief Facility to circa 450 SMEs which have been approved in the last 2 months.

• The group’s exposure to vulnerable sectors (restaurants, hotels, travel, tourism and transportation) is 2.0% of its total loans or RM871mil. On a comforting note, the group does not have any bond exposures to the vulnerable sectors. Also, it is not exposed to loans to airlines. Exposure to the electricity, utilities and oil & gas sectors is low at 0.1% or RM44mil. For oil & gas loans, ABMB’s exposure is mainly to borrowers with downstream operations.

• Recall that the group’s gross loans grew 5.5% YoY in 3Q20. We expect the loan growth to taper to 2.0–3.0% YoY in 4Q20 with the slowdown in SME and AOA loans.

• NIM is likely to remain under pressure in the near term due to the recent 25bps cut in the OPR in March 2020 and potentially another 25–50bps cut in May 2020. The full FY20 NIM is likely to end close to the group’s guidance of 2.37%. Every 25bps cut in the OPR will impact NIM by 5–6bps and profit before tax of RM40mil. The group still has room to monetize gains from sale of AFS though the FVTOCI in 4Q20 has trended lower than 3Q19’s RM165mil due the rise in yields in the first 3 months of 2020.

• Credit cost is expected to rise in 4Q20, ending FY20 higher than the guidance of 0.55% to 0.60%. As the moratorium is between 1 April and 1 October 2020 (6 months), the group’s asset quality and credit cost in 1Q21 and 2Q21 are likely to be stable because there will be no deterioration in staging of loans during this period. Also, any R&R of loans until 31 Dec 2020 will not be classified as impaired. However, there will be downside risk to credit cost in 4Q21 if the Covid-19 pandemic is prolonged.

• On NOII, we expect a slowdown in wealth management fees and bancassurance income from moderation of growth in mortgage loans. To assist consumers during the Covid-19 outbreak, the group will be granting a fee rebate for each ATM MEPs transaction for 1 month commencing 26 March 2020. This will also impact its NOII.

• There is no change to the group’s dividend policy and we continue to assume a dividend payout of 48.0% for FY20 and FY21.

• Foreign shareholdings of the stock have declined 20.9% as at the end of March 2020 from 22.9% in Dec 2019. The group is targeting to release its 4Q20 results on 28 May 2020.

Source: AmInvest Research - 23 Apr 2020