Investment Highlights

• We maintain our HOLD rating on Alliance Bank Malaysia Bhd (ABMB) with an unchanged fair value of RM3.90/share. Our fair value is based on FY18 ROE of 9.2%, leading to a P/BV of 1.1x. No changes to our earnings forecast.

• The group reported a 2QFY18 net profit of RM123mil (- 9.0%YoY) with a marginal increase in total income offset by higher opex due to higher transformation investments and increase in provisions for loan impairment. 1HFY18 earnings slipped 2.7%YoY to RM258mil.Cumulative earnings were within expectation, making up 52.7% and 51.7% of our and consensus estimates respectively.

• Recall, the group will be incurring expenses to offer new value propositions (technology-based products/services) to its customers. This included scaling up of sales force, as well as expenses on IT, marketing and restructuring which will raise its opex in the near term to create new revenue streams and achieve cost savings. YTD, the group has incurred RM23.3mil out the planned total expenditure of RM90mil. Further restructuring cost has been incurred in 3QFY18, and we expect its opex to trend higher in the near term due the additional investments for the group’s transformation.

• Loan growth remained subdued at -0.5%YoY in 2QFY18. This was due to the group's focus in growing higher risk adjusted (RAR) loans to improve its NIM, which led to a high attribution of the lower RAR loans (mortgage, business premises loans and HPs). The group's loan growth continued to be slower than the industry’s growth rate.

• 2QFY18 saw the group's NIM improved by 6bps QoQ to 2.38% due to higher asset yield from its focus in higher RAR loans while funding cost remained stable.

• The group recorded a negative JAW of 1.1% as the group incurred transformation investments, which raised its opex. 1HFY18 CI ratio rose to 47.0% due to the higher investment expenditure.We continue to expect the group's CI ratio to rise to 50.0% eventually for the full FY18.

• Absolute impaired loans balance rose by 4.5%QoQ, driven by upticks in impaired loans for purchase of residential property, personal, credit card and working loans. GIL ratio inched up to 1.17% from 1.12% in the preceding quarter. Net credit cost for 1HFY18 was 0.34% (1HFY17: 0.18%), and remained slightly above our assumption of 0.30% for FY18.

• Base on the group’s preliminary assessment, and on the group’s position as of the end of September 2017, provisions are required to be raised by a circa 25% or RM190mil on its total provisions (collective allowance + individual allowance + regulatory reserve). This will have an impact of 60bps on its CET1 ratio.

Source: AmInvest Research - 4 Dec 2017