Alliance Bank (ABM) reported a decent 1QFY19 with net profit of RM136.4m (+1.0% yoy; +20.8% qoq), below our forecast though within market expectations. Fund-based income was the primary driver in 1QFY19, as NIM continued to expand +11bps yoy to driven by robust growth of the higher risk-adjusted return (RAR) loans (Alliance One Account, SME & Commercial, unsecured consumer). On the other hand, ABM saw its asset quality weakened by higher defaults in commercial properties and a few business accounts Reiterate BUY, however Price Target is being adjusted down to RM5.00 (from RM5.30) as we revised down earnings by 7-8% for FY19-20E.

A Decent Quarter Driven by Fund-based Income; GIL Ratio Weakened

Alliance Bank Malaysia (ABM) reported a marginal 1% yoy growth in 1QFY19 net profit at RM136.4m, though on a qoq basis, net profit grew by 20.8% as overheads declined (-13.6% qoq) on lower marketing expenditure. Meanwhile, pre-provision operating profit (PPOP) saw a decent growth of 3.7% yoy in in 1Q18, underpinned mainly by stronger fund-based income (+8% yoy) while offset by weaker non-interest income (-10.4% yoy) and increased operating expenses (+3.8% yoy). With the adoption of MFRS 9, the overall net credit cost has increased to 36.8bps in 1QFY19 vs. 30.9bps in 1QFY18 while assets have also been weakened by increased defaults in commercial property and several business accounts.

Earnings Revision of -8.3%-8.2%/-7.2% for FY19E/20E/21E

For FY19-21E, we are revising up our credit cost assumptions from 24-25bps to 35bps, in-line with management’s expectation as well as to factor-in the deterioration in asset quality caused by ABM’s commercial property and working capital accounts. Our GIL ratio assumption has been raised from 1.0% to circa 1.5-1.6% for FY19-21E, while loan loss cover (including regulatory reserves) adjusted to c.100% (from 90% previously).

Maintain BUY; PT Revised Down From RM5.30 to RM5.00

We maintain our BUY rating on ABM, but revise down our 12-month Price Target from RM5.30 (at 1.35x CY19E P/BV multiple) to RM5.00 (based on 1.3x CY19E P/BV target, underpinned by a CY19E ROE of 10.0% and an 8.2% cost of equity. Our FY19E assumptions are based on modest loan growth target of 3.7% yoy, NIM at circa 2.4%, credit cost at 35bps, CIR at 48.6%. ABM’s management is still maintaining a net profit growth target of >10% with ROE at circa 10%. Downside risks – weaker economic outlook, NIM compression, asset quality issues.

Source: Affin Hwang Research - 3 Sept 2018