ABM reported a 3Q FY18 net profit of RM122.6m (flat qoq; -5.5% yoy) due to higher overhead from its transformation initiatives. The 9M FY18 net profit of RM380.4m was within our expectations. Fund-based and non-fund based income remained key drivers for 9M FY18, apart from a one-off credit recovery in 3Q FY18. Progress of the Alliance One Account is steadily gaining ground since launch in April 2017 with sales approval now at RM1.5bn ytd (from RM580m in 2Q FY18) while Alliance @ Work program now has > 10,000 employee accounts opened (from 9,000 in 2Q FY18). We reaffirm our BUY call and finetune up our TP to RM4.80 after lifting our FY18-20E EPS by 1-3%.

Marginal Decline in 9M FY18 Net Profit Due to Ongoing Investments

Alliance Bank Malaysia (ABM) reported a marginal decline of 3.6% yoy in 9M FY18 net profit to RM380.4m (normalized RM422.3m) as the group had incurred some RM60m in transformation initiative costs (with another RM30m to be spent in 4Q FY18), which are expected to translate into future cost savings of RM6m p.a. and revenue synergies of RM9m p.a.. Otherwise, normalized 9M FY18 net profit would have been RM422.3m (+7% yoy). During the period, 3Q FY18 also saw a non-recurring credit recovery of 8.1bps (annualized) (related to a write-back from credit rating scale alignment for corporates), which hence lowered the 9MFY18 net credit cost to 18.9bps, vs. 27.9bps on a normalized basis.

Higher RAR Loans Continue to Expand – the Key NIM Driver

For 9M FY18, the higher risk-adjusted-returns (RAR) loans (SMEs/ unsecured consumer/ Alliance One Account) continued growing at a rate of 12.4% yoy, while the lower RAR loans (mortgages/corporate/HP) declined by 6.6% yoy. Hence, it is not a surprise to see overall group loans flat yoy. In 9M FY18, fund-based income grew strongly by 5.6% yoy due to a 10bps NIM expansion to 2.36% given management’s focus to grow higher RAR loans and expand the CASA ratio to 39.5% (from 34.1% last year).

Maintaining Our BUY Call; Lifting Our TP to RM4.80, From RM4.70

We maintain our BUY rating on ABM, and lift our 12-month target price to

RM4.80 (from RM4.70), based on a 1.3x CY18E P/BV multiple, underpinned by a CY18E ROE of 9.7% and a 8.6% cost of equity. We finetune up our FY18-20E earnings by 1-3% as we price in the impact of the 25bps OPR hike. Downside risks – NIM compression, weaker asset quality.

Source: Affin Hwang Research - 27 Feb 2018