Alliance Bank’s 4QFY18 net profit was broadly in line. Earnings contracted 3.8% yoy on higher transformation cost. Excluding the transformation cost, BAU FY18 earnings expanded 6.6% yoy, driven by higher NIM and trading-related income. Loans growth was flattish while asset quality deteriorated qoq due to legacy commercial property GIL. Maintain HOLD with an unchanged Gordon-Growth derived target price of RM4.30 (1.19x FY19F, 10.0% ROE). Entry level: RM3.90

RESULTS

4QFY18 earnings in line. Alliance Bank Malaysia (Alliance Bank) reported a 4QFY18 net profit of RM112.8m (-5.5% yoy and flattish qoq) and FY18 earnings of RM493.3m (-3.6% yoy), was in line with both our and consensus estimates with FY18 earnings representing 100% of our full-year estimate. 4QFY18 earnings declined 3.8% yoy despite a 9.8% yoy increase in revenue due to: a) upward normalisation in credit cost to 37bp (4QFY17: 28bp); and b) 17.1% 4QFY18 yoy increase in opex, partially due to a RM14.7m transformation cost incurred (FY18: RM74.2m) which impacted earnings. Excluding the lumpy transformation cost, core opex was up 8.8% yoy in 4QFY18 and 4.0% yoy in FY18. Excluding the transformation cost, FY18 and 4QFY18 CIR would have reflected improvements of 140bp and 40bp to 45.7% and 48.9% respectively.

Revenue growth driven mainly by trading and forex-related income. Revenue growth of 7.0% yoy in FY18 and 9.8% yoy in 4QFY18 was driven largely by 11.2% yoy and 22.6% yoy increases in non-interest income respectively. Unfortunately, this was mainly attributed to volatile trading and forex-related income. Client-based fee income expanded a more modest 4.4% yoy.

Asset quality experiencing some pressure. Gross impaired loans (GIL) ratio rose 25.0% qoq, mainly driven by a 88% qoq spike in non-residential property GIL. Minimal provisions have been made, as collateral values of the commercial properties were deemed sufficient. This led to a decline in loans loss coverage (LLC) ratio to 64.5% in 4QFY18 vs 76.2% in 3QFY18 and a spike in GIL ratio to 1.42% vs 1.18% in 3QFY18. However, inclusive of regulatory reserves, LLC stood at 96% The group’s net credit cost increased qoq to 37bp in 4QFY18 vs a net write back in 3QFY18 while full year FY18 net credit cost came in at 24bp. Moving forward, we are forecasting a more normalised 35bp net credit cost in FY19 as lower recoveries coupled with the effects of MFRS9 kicks in.

NIM expanded on better risk-adjusted returns and OPR hike. On a more positive note, NIM expanded 14bp yoy and 6bp qoq on the back of the recent 25bp OPR hike and the group’s focus on rebalancing its portfolio to higher risk-adjusted return loans (like SME and personal loans which expanded 9.6% and 24.5% respectively vs a contraction in lower yielding mortgage and hire purchase loans). As such, despite a flattish loans growth trend, the group managed to deliver a 5.5% net interest income growth.

EARNINGS REVISION/RISK

No changes.

VALUATION/RECOMMENDATION

Maintain HOLD with an unchanged Gordon Growth-derived target price of RM4.30 (1.19x FY19F, 10.0% ROE). The recent weakness in asset quality could cap share price performance in the near term.

Source: UOB Kay Hian Research - 1 Jun 2018