Investment Highlight

• We maintain our BUY recommendation on Alliance Bank Malaysia (ABMB) with a higher fair value of RM5.00/share (previously: RM4.40/share). Our revised fair value is supported by an FY19 ROE of 10.0%, pegging the stock to a P/BV of 1.3x (previously: 1.2x). We have tweaked our FY19/20 estimates by 0.8%/4.9% respectively by adjusting our net interest income estimates.

• The group reported a net profit of RM113mil in 4QFY18 (- 7.9%QoQ; -3.8%YoY) which led to a 12MFY18 earnings of RM493mil (-3.7%YoY). Cumulative earnings were in line with expectations, making up 99.1% of our and 97.0% of consensus estimates respectively.

• FY18 earnings were impacted by investment expenses for the group’s transformation. Moving into FY19, investment expenses will be lower while higher revenue will be realised from its transformation initiatives.

• Gross loan growth was faster at 2.5%YoY in 4QFY18 compared to -0.5%YoY in 3QFY18, but continued to lag behind the industry loan growth rate of 4.4%YoY. Although the higher RAR loans have grown, this was offset by the runoff of the lower RAR loans, in particularly mortgage and HP loans.

• 4QFY18 saw the group's NIM expand by 12bps QoQ to 2.50%. Both the recent hike in OPR and change in loan mix, which was biased towards increasing the higher RAR loans, accounted for circa 6bps impact each on the expansion in the margin by 12bps.

• Negative JAW persisted due to higher OPEX in FY18 arising from transformation investments. This has caused its OPEX to outpace the growth in revenue, and consequently increasing its CI ratio to 50.5%. Excluding the transformation investments, FY18 BAU CI ratio was 46.0%.

• Absolute impaired loan balance rose by 25.1%QoQ in 4QFY18, higher than the preceding quarter. The uptick was contributed by higher impaired working capital and loans for purchase of non-residential property. The group’s credit cost was 0.23% in FY18 (FY17: 0.25%), lower than our assumption of 0.35%.

• A second interim dividend of 6.8 sen/share has been proposed, bringing the FY18 total dividends to 15.3 sen/share (payout: 48%) which was close to our estimate of 16.4sen/share.

• Management is maintaining its day-1 impact guidance of MFRS 9 of a 40bps decline to CET1, Tier 1 and total capital ratios which as at the end of 4QFY18 stood at 13.4%, 13.8% and 18.3% respectively. Recall, the expectation increase in provision will not exceed an increase of 25% above its total provisions (not more than circa RM146mil).

Source: AmInvest Research - 1 Jun 2018