Investment Highlight

• We maintain HOLD on Alliance Bank Malaysia (ABMB) with an unchanged fair value of RM2.00/share. Our fair value is based FY22 P/BV of 0.5x, implying an ROE of 7.4%. No changes to our earnings estimates.

• The group reported a higher core net profit of RM104mil in 1Q21 (+6.4% QoQ, +36.0%YoY). On a YoY basis, the improvement was attributed to higher treasury and investment income which lifted the group non-interest income (NOII) higher and lower opex. However, the positives were partially offset by lower interest income from consecutive rate cuts and higher provisions.

• Modification loss was RM64.4mil in 1QFY21 (conventional loans: RM27.5mil and Islamic financing: RM36.9mil). ABMB received a government financing scheme for SMEs at below market/concession rate. The total benefits from the RM65.7mil financing scheme were applied to address the financing and accounting impact incurred for Covid-19-related relief measures. The impact on interest income from the modification loss and the benefit from the government scheme was negligible.

• 1Q21 core earnings were within expectations, making up 29.0% of our and 25.8% of street estimates.

• Operating expenses (opex) declined by 4.8% YoY in 1Q21 due to lower personal, marketing and IT expenses. CI ratio improved to 44.3% for 1Q21. 1Q21 JAW was a positive 8.9% YoY.

• Gross loan growth moderated to 1.7% YoY (4Q20: 2.2% YoY), still behind the industry’s growth of 4.1% YoY.

• 1Q21 saw interest margin compressed by 17bps to 2.21% from FY20’s NIM due to the consecutive OPR cuts. We continue to expect higher compression in the interest margin of ABMB ahead due to further rate cuts. In addition to July 2020’s 25bps OPR reduction, we expect another rate cut of 25bps in Sept 2020.

• The group’s GIL ratio declined to 1.89% in 1Q21 from 2.00% in 4Q20 with lower new impairment loans formation. Impaired loans for purchase of residential property and personal loans slowed down QoQ.

• Annualised credit cost based only on loans for 1Q21 remained elevated at 0.88% (4Q20: 0.90%). This included an annualised 0.54% of pre-emptive provisions for the higher risk segments.

Source: AmInvest Research - 28 Aug 2020