Investment Highlights

• We maintain our BUY rating on Alliance Bank Malaysia (ABMB) with an unchanged fair value of RM4.40/share. Our fair value is based on FY19 ROE of 10.3%, leading to a P/BV of 1.2x. We have fined-tuned our FY18/19 estimates higher by 1.7%/1.9% respectively after factoring in higher NIM estimates as well as lowered our loan growth projections.

• The group reported a net profit of RM123mil in 3QFY18 (- 0.2%QoQ) which led to a 9MFY18 earnings of RM380mil (- 3.6%YoY). Cumulative earnings were within expectations, making up 77.7% of our and 76.9% of consensus estimates respectively.

• YTD, the group has expensed RM59.5mil (RM40.1mil for restructuring and RM8.5mil for ramping up of sales force) out of the total planned expenditure of RM90mil for its transformation investments. Further investment expenses will be incurred. However, the amount is expected to be gradually reduced moving into FY19, resulting in a lower drag on its earnings in the next financial year.

• Loan growth remained subdued at -0.5%YoY in 3QFY18, lagging behind the industry growth of 4.1%YoY. This has contributed by the run-off of lower RAR loans which had offset the growth in higher RAR loans.

• 3QFY18 saw the group's NIM remaining stable QoQ at 2.38%. For 9MFY18, NIM expanded 11bps YoY to 2.36%, supported by improved yields from a stronger growth in higher RAR loans.

• The group recorded a negative JAW of 7.9% for 9MFY18 due to transformation investments of RM59.5mil, which caused its OPEX to outpace the growth in revenue. Excluding the transformation investments, BAU cost growth would be lower at 2.3%YoY against a total income growth of 6.0%YoY. 9MFY18 CI ratio was 49.8% (44.9% if exclude transformation investments).

• Absolute impaired loan rose 1.7%QoQ in 3QFY18 but was smaller compared to 2QFY18's 4.5%QoQ increase. Group GIL ratio inched up slightly to 1.18% compared to 1.17% in the preceding quarter. The group reported a net write-back in provisions for loans of RM8mil compared to a provision of RM34mil in the preceding quarter. The net write-back was due to alignment of credit rating scale for corporate loans. We understand that the PD (probability of default) for corporate loans was lowered in 3QFY18.

• The group reported a higher net credit cost of -0.08% in 3QFY18 vs. 0.34% in 2QFY18. For 9MFY18, the group’s credit cost was 0.19%. Excluding the one-off adjustment in PD for corporate loans, normalised credit cost for 9MFY18 was 0.28%.

• Base on the group’s preliminary assessment, day 1 impact of MFRS 9 would be manageable with an impact of a 50bps decline in both CET1 and Tier 1 capital ratios. As at the end of 3QFY18, group CET1 and Tier capital was 13.6% and 14.0% respectively.

Source: AmInvest Research - 27 Feb 2018