Alliance Bank (ABM) reported a 4Q FY18 net profit of RM112.9m (-7.9% qoq; -3.8% yoy) due to higher investment costs on its transformation initiatives. FY18 net profit of RM493.2m (-3.7% yoy) was within our and consensus estimates. Fund-based and non-fund-based income remained key drivers for FY18, apart from a one-off credit recovery in 3Q FY18. Progress of the Alliance One Account is steadily gaining ground since its launch in late April 2017, with sales approval now at >RM2.4bn ytd (from RM1.5bn in 3Q FY18) while the Alliance @ Work program now has >10,000 employee accounts opened since its launch. We reaffirm our BUY call and adjust our TP to RM5.30 (from RM4.80) as we shift our valuation horizon to CY19.

Headline Net Profit Decline in FY18 Due to Investment Capex

Alliance Bank Malaysia (ABM) reported a marginal decline of 3.7% yoy in FY18 net profit to RM493.2m as the group incurred a net amount of RM74.2m for its transformation initiative costs, which are expected to translate into future cost savings of RM6m p.a. and revenue synergies of RM9m p.a. Otherwise, normalized FY18 net profit would have been c.RM550m (+7.3% yoy). For 4Q FY18, the key drivers were fund-based income (+6.4% yoy and +2.9% qoq) and non-interest income (+22.7% yoy and +7.7% qoq). FY18 NIM, at 2.4%, rose by 14bps yoy under management’s focus on the higher risk-adjusted return (RAR) loans, while 4Q FY18 was up 1bp to 2.5%.

KPIs for FY19 – Targeting More Robust Loan Growth

For FY19, ABM is targeting loan growth of >10%, maintaining NIM at 2.4% and NPAT growth of >10% with an ROE of c.10% (including the Phase 2 of its transformation investment totaling RM70m). Its cost-to-income ratio is expected to come under 50%. The game plan in FY19 is to continue beefing up its sales force, further enhance the digital/technology capabilities of its platform/branches and step up marketing initiatives of the AOA, Alliance@Work.

Maintain BUY; Adjusting Our TP to RM5.30 From RM4.80

We maintain our BUY rating on ABM, and lift our 12-month target price to RM5.30 (from RM4.80), based on a 1.35x CY19E P/BV multiple (from 1.3x CY18E P/BV target), underpinned by a CY19E ROE of 10.0% and an 8.9% cost of equity. For FY19, we also make some adjustments to our forecasts (FY19E +0.8%; FY20E +8.2%), fine-tuning our net interest income in particular. Downside risks – weaker economic outlook, NIM compression, asset quality issues.

Source: Affin Hwang Research - 1 Jun 2018