Temporary Disruption in Earnings

Alliance Bank reported a lower 2QFY18 net profit of RM122.8m (-9% qoq; -7.4% yoy) due to the on-going transformation initiatives cost as well as higher allowances. Though there is still another RM67m or so investments to be spent in 2HFY18, we view this move as a temporary disruption to this year’s earnings, which we forecast at RM468.6m (vs. FY17’s net profit at RM512m). The 1HFY18 results were within our expectation. Maintain BUY, PT at RM4.70.

Marginal Decline in 1HFY18 Net Profit Due to Ongoing Investments

Alliance’s 1HFY18 net profit declined by 2.7% yoy to RM257.8m as 2QFY18 saw profits weakened further by 9% qoq to RM122.8m as a result of the on-going transformation initiatives (year-to-date RM23.3m investments have been incurred out of a total of RM90m) and higher allowances (credit cost crept up from 17.9bps last year to 32.5bps). Otherwise, on a business-as-usual (BAU) basis, 1HFY18 net profit would have grown by 3.5% yoy while the cost-to-income ratio would be at 44.1% (vs. actual at 47%). The 1HFY18 results were in-line with our expectation though below consensus estimates.

Fund-based Income the Key Driver as Higher RAR Loans Expand

For 1HFY18, fund-based income grew strongly by +7.4% yoy on the back of a +12bps NIM expansion to 2.35%. (given management’s focus to grow the higher risk-adjusted return (RAR) loans) while non-interest income rose 9.4% yoy due to lower forex losses and growth in client based-fee income. Though gross loans declined by 6.3% yoy, it was a deliberate move to rebalance its overall portfolio to gear towards the higher RAR loans (which was up +11.8% yoy as at 2QFY18) while simultaneously reducing the lower RAR loans (-5.9% yoy). Sales acceptance for the Alliance One Account (a loan-consolidation service for consumers) has reached RM580m from RM300m qoq while Alliance @ Work has attracted 9,000 employees to sign up from 2,400 employees on a qoq basis.

Maintain BUY and Price Target of RM4.70; Forecasts Unchanged

We Maintain Our BUY Rating on AFG, With Our 12-month Price Target unchanged at RM4.70, based on a 1.28x CY18E P/BV multiple, underpinned by a CY18E ROE of 9.7% and a 8.7% cost of equity. We expect NIM at 2.2-2.24% and loan growth at 5-6% yoy in FY18-20E. Management expects an annual cost saving of RM6m from an operational restructuring and new revenue of RM9m p.a. from the initiatives. Risks – NIM compression, deterioration in asset quality.

Source: Affin Hwang Research - 4 Dec 2017