We believe Alliance Bank Malaysia (ABMB) continues to make a difference against peers amidst a more cautious market through key products, i.e. Alliance ONE Account, SME Banking and Alliance@Work) and in an enhanced digital ecosystem. Operationally, though FY20E NIMs may see some contraction of between 5-10bps yoy, we believe that downside risks are mitigated by stronger loan growth through its new marketing initiatives. Its credit cost (FY20E:35bps) and cost-to-income ratios are expected to remain steady notwithstanding a cautious market outlook and the need to beef up technology and upscale staff force. Maintain BUY, PT unchanged at RM4.80 (1.18x CY20E P/BV).

Innovating Through Higher Risk-adjusted Return (RAR) Loans

Being a small bank, ABMB has been focusing on boosting the higher RAR loans (+27% yoy in FY19) while reducing its exposure to the lower RAR loans (-5.8% yoy). The strategy has worked well, as reflected by the robust growth of the Alliance One Account (+220% yoy) and the SME and commercial (+12.7% yoy) loanbook in FY19. The robust growth of the higher RAR loans had resulted in the expansion of ABMB’s NIM over the last four years, from 2.15% FY16 to 2.5% in FY19.

FY20E – continue to stay differentiated; leveraging on digital channel

ABMB continues to differentiate in its growth and marketing strategies, for instance launching the ‘Alliance Mortgage Partner-in-Sales’ programme, which have seen loan approvals of AOA was up 36% yoy to RM3.33bn while its disbursement was up 102% yoy. SME and commercial loans, (27% of ABMB’s loanbook as at FY19), grew by 12.7% yoy, partially driven by the launch of a Alliance Origination System (launched in July 2018). Accordingly, 95% of new SME loans are processed through this system, which allows for faster disbursement of the loans (in less than 5 days).

Reaffirm BUY Rating, PT Unchanged at RM4.80 (1.18x CY20E P/BV)

Reaffirm BUY on ABMB, with a 12-month PT of RM4.80 based on a 1.18x CY20E P/BV multiple, underpinned by a CY20E ROE of 10% and a 9.2% cost of equity. We believe that though NIM will potentially see a pullback to 2.45-2.48% in FY20E-22E vs. 2.5% in FY19 (due to impact of the OPR cut), ABMB’s loan growth is expected to outperform industry growth, i.e. at 6.5% FY20E. Downside risks – NIM compression, higher credit loss.

Source: Affin Hwang Research - 15 Jul 2019