Banking on Niche Markets

Alliance Bank Malaysia (ABM) remains operationally strong with steadily improving NIM, stable fee income generation and a sound loanbook (as implied by a GIL ratio 1.18%, LLC at 121.9% in 9MFY18). Potential for earnings upside lies in FY19E after the completion of a transformation exercise in FY18, leading to higher sales productivity to drive operating income expansion while the cost-to-income ratio may see further improvement. Meanwhile, we do not expect a detrimental impact to its earnings with the adoption of MFRS 9 standards. Maintain BUY, PT at RM4.80 (1.3x P/BV target).

Expansion in the Portfolio of Better ‘RAR’ Loans Boost Income

Being a smallish bank, ABM’s core strategy has been to boost the higher ‘risk-adjusted return’ (RAR) loans as the group does not compete directly in the same space as the large-sized banks do. The strategy has worked well, and this has been reflected in its higher NIMs (9MFY18: +11bps) and the expansion in fund-based income (9MFY18: +5.6% yoy) despite flat loans growth as at Dec 2017. Overwhelmingly positive response to the Alliance One Account loan consolidation account (launched April17), with loan approvals of RM1.5bn ytd will be a boost to the higher RAR portfolio.

Transformation Exercise to Raise Group’s Productivity Completed

ABM undertook a transformation exercise at the start of FY18E, with initiatives targeting the SME customers, migration of consumer loan accounts, streamlining and restructuring branches, beefing up the sales workforce and on technology/marketing. Of the total cost of RM90m, RM59.5m has been spent in 9MFY18.

MFRS 9 Impact Should Not be Detrimental to Profits

Given ABM’s sound asset quality (GIL ratio 1.18%), in our view, the balance sheet adjustment for additional provisions on Day-1 (starting 1 April 2018) should not be an issue.

Reaffirm BUY Rating, PT Unchanged at RM4.80 (1.3x P/B Target)

Reaffirm BUY on ABM, with a 12-month PT of RM4.80 based on a 1.3x CY18E P/BV multiple, underpinned by a CY18E ROE of 9.7% and a 8.6% cost of equity. Though FY18E is expected to see a dip in earnings, we believe that FY19E will be a year where there will be more earnings upside due to potentially higher revenues and the absence of the one-off transformation cost. Downside risks – NIM compression, higher credit loss.

Source: Affin Hwang Research - 19 Apr 2018