Alliance Bank results were within expectations, with 4Q18 net profit of RM112.9m (-3.8% YoY,-7.9% QoQ) brought FY18 net profit to RM493m (- 3.7%YoY) making up 103.9% and 98.2% of our and consensus forecasts. Loan growth finally posted at positive pace, in contrast to deposits that continued at weaker trend. Despite the improving loan growth, GIL rose substantially to 1.43%. We upgrade our rating to BUY with higher TP of RM 4.90. TP is based on GGM of i. COE of 10.8% ii. WACC of 8.6%

Results in line. 4Q18 net profit of RM112.9m (-3.8% YoY,-7.9% QoQ), brought FY18 net profit to RM493m (-3.7% YoY). The performance met expectations, accounting for 103% and 98.2% of our and consensus estimates.

Dividend. Proposed 2nd interim DPS of 6.8 sen, bringing total DPS to 15.3 sen for FY18, translating to 48% payout ratio and dividend yield of 3.6%.

QoQ. 4Q18 net profit fell by 7.9% on the back of acceleration in the loan loss provision to RM37.6m, weighed by higher collective assessment before the implementation of MFRS9 in the coming quarter. Nevertheless, it was mitigated by rapid growth in NOII by 7.6%, and and was further backed lower overhead expenses incurred (part of it was transformation cost) by -1.5%.

FY18. FY18 net profit slid 3.7% to RM493m, dragged by higher overhead expenses (+14.8%), however this was mitigated by healthy growth in NOII (+11.6%) and NII (+5.8%). Higher NOII was backed by lower MTM loss and higher fee based income. LLP stayed elevated despite posted higher recoveries. FY18 credit cost ended lower at 23.7bps thanks to a lumpy write-back during 3Q18.

Loans. After 2 consecutive quarters of contraction, loan returned to positive growth at 2.5% yoy. Higher RAR loans expanded by 19.3% YoY, driven by SME segment (+9.4% YoY). In addition, Alliance One Account managed to bookRM1.04bn loan in FY18 despite it was only introduced in.1H18. Lower RAR loans continued to slide by 5.3% YoY, dragged by mortgage and hire purchase segments.

Deposits. Total customer deposits was subdued at -3.3%YoY as Alliance decided to reduce further expensive deposits namely NIDS by 3.8% YoY. CASA meanwhile tracking subdued deposits growth, slid to 37.3% from 39.5% from 4Q17. The OPR hike in January-18 benefiting its cost of funds, as ABMB managed to grew its NIM by 2bps QoQ to 2.4%

Asset quality. NPL continued to accelerate, rising by 25% QoQ, which pushed GIL to 1.43% (from 1.18% at end-Dec-17). Contribute to the weakness were hire purchase and non-residential, which witnessed its GIL to at 1.46% (1.18% in 3Q18) and 2.25% (1.23% in 3Q18) respectively.

Forecast. We raise our FY19-20 net profit forecasts by 7.6% and 6.8% as we raise our loan growth and lower our credit cost assumptions, in line with management guidance.

Upgrade to BUY, TP: RM4.90. Alliance making swift progress on its various initiatives. This includes Alliance One Account and Alliance@Work successfully growing ABMB’s loan growth and CASA respectively. We upgrade our rating to BUY, with revised TP by 14% to RM4.90 as we raise our net profit forecasts and roll forward our valuation base year. GGM-derived TP is based on (i). COE of 10.8%, and (ii). WACC of 8.6%.

Source: Hong Leong Investment Bank Research - 1 Jun 2018