Alliance Bank (ABM) reported a decline of 43.8% yoy and 31.4% qoq in its 1QFY20 net profit, below our and consensus estimates, dampened by higher-than-expected provisioning (+50% yoy) for a few large accounts and a full impairment charge on one account. Though there has been some uptick (+0.2ppts) in its GIL to 1.3% in 1QFY20, we take comfort in ABM’s high loan loss coverage of 128.2%. We downgrade our rating to HOLD (from BUY) with a lower PT of RM3.20 (at a 0.87x CY20E P/BV target; from RM4.80). Despite revising down the FY20-22 earnings forecasts by 9.9%-21.8% (by raising our credit cost assumptions), we expect its 2HFY20 outlook to improve on the back of normalization in the NIM and robust demand for its niche loan/financing products.

Results Below Expectations Due to Higher Credit Cost and Impairment

ABM’s 1QFY20 net profit disappointed us, as it declined 43.8% yoy to RM76.7m (-31.4% qoq), dampened by a 50% yoy increase in provisions (equivalent to an annualized net credit charge of 52.4bps) and a full impairment charge of RM49.4m. Otherwise, net operating income was relatively flat, +1.5% yoy. Meanwhile, the weaker fund-based income (-2.4% qoq), was expected due to the OPR cut. The 1QFY20 NIM shrank 17bps qoq and 3bps yoy to 2.4%. On a more positive note, ABM’s loans grew at a favourable 6.0% yoy, underpinned by the higher risk-adjustedreturn (RAR) loans which were up 25.8% yoy.

Lowering FY20-22 Earnings Forecasts by 9.9-21.8%

We lower our FY20E/FY21E/FY22E net profit by 21.8%, 9.9% and 11.9% respectively as we factor in an additional impairment charge totalling RM60m for FY20E and raise the net credit cost to between 43-50bps from 30-33bps for FY20E-22E.

Downgrade to HOLD; PT Revised Down to RM3.20 From RM4.80

We downgrade ABM from a BUY to HOLD, with a revised 12-month Price Target of RM3.20 based on a 0.87x P/BV target on CY20E BVPS (from previous PT of RM4.80, based on a 1.12x P/BV target), with a CY20E ROE of 8.7% and a cost of equity of 9.7%. Our FY20E assumptions: loan growth target of 5.5% yoy, NIM at circa 2.4%, credit cost at 50bps, CIR at 47%. Downside risks – weaker asset quality. Upside risks – credit recovery, higher NIM.

ABM Is Currently Trading at -2.4SD, Share Price at 5-year Low

At the current price, ABM is trading at a 5-year low while the FY20E P/BV multiple of 0.75x is equivalent to a -2.4SD below the mean level. ABM last took a major provisioning on its loan book back in 2006 (net loss RM201m), and in the subsequent years, earnings recovered, reflecting management’s prudent lending policy and strict credit criteria.

Source: Affin Hwang Research - 28 Aug 2019