Alliance Bank (ABM) reported a FY19 net profit of RM537.6m (+9.0% yoy) while core net profit grew 2.3% yoy. Results were below Affin’s estimates but within consensus. The variation against Affin’s forecast was due to lower actual non-interest income. Though it has been a challenging year, ABM managed to drive overall NIM (+10bps) higher yoy vis-à-vis peers, which saw compression instead. This was made possible through management’s aggressive drive to promote higher risk-adjusted-return (RAR) loans such as the Alliance One Account, SME & Commercial and unsecured consumer loans. Asset quality remained intact, as its implied GIL ratio improved to 1.1% (FY19) from 1.4% in FY18. We remain upbeat on ABM’s strategy, i.e., to focus on better returns and niche segments. Reiterate BUY but with a lower Price Target of RM4.80 (at a 1.12x CY20E P/BV target).

Stronger RAR Loan Growth Drives NIM Expansion

Alliance Bank Malaysia (ABM) reported a robust 9.0% yoy growth in FY19 net profit to RM537.6m, underpinned by net operating income growth of 3.2% yoy, as fund-based income rose by a robust 10.9% yoy (underpinned by a +6.0% yoy loan growth and NIM expansion of +10bps yoy to 2.5%). On the other hand, FY19 non-interest income (-24% yoy) was weakened by lower wealth-management fees and banking fees. Asset quality has been stable, while the FY19 net credit cost of 31.5bps (vs. 23.4bps FY18) was within guidance of 35bps.

Downward Earnings Revision of 7.5-9.5% for FY20E-21E

We revise down our FY20E and FY21E net profit estimates by 5.2% and 5.0% respectively to account for potentially less profitable NIM expectations as a result of the higher amount of term deposits raised in FY19 as well as the impact of the OPR cut and lower non-interest income.

Maintain BUY; PT Revised Down to RM4.80 From RM5.90

We maintain our BUY rating on ABM, with a revised 12-month Price Target of RM4.80 based on a 1.12x P/BV target on CY20E BVPS (from previous PT of RM5.90 based on a 1.44x P/BV target on our CY19E BVPS), underpinned by a CY20E ROE of 10.0% and a 9.5% cost of equity. Our FY20E assumptions are based on a loan growth target of 4.5% yoy, NIM at circa 2.4%, credit cost at 35bps, and CIR at 43%. 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, and asset-quality issues.

Source: Affin Hwang Research - 30 May 2019