Alliance Bank’s 9MFY20 earnings were down 23.4% yoy to RM326.2m, due primarily to the significantly higher impairment provisions ytd (driven by provisions on a few large accounts, conventional mortgage accounts and the Alliance One Account portfolio). Overall, the results were within our and street expectations. On a more positive note, provisions declined on a qoq basis due to 2 legacy account recoveries and improved collections. We continue to stay cautious on ABM, due to asset quality issues as the GIL ratio deteriorated further from 1.66% in 2QFY20 to 1.86% in 3QFY20 (due to mortgages and personal loan accounts). Our FY20-22 forecasts have been lowered by 5.9% / 4.0% / 3.2% as we factor in a 50bps OPR cut. Reiterate HOLD, with a lower 12-month PT of RM2.40.

Weaker Net Profit Driven by Deterioration in Asset Quality

Alliance Bank (ABM) reported another improved quarter, with 3QFY20 net profit up 16% qoq, as provisions declined (-46% qoq) coupled with an impairment write-back. Nonetheless, for 9MFY20, net profit was down 23.4% yoy, as significantly higher provisions (+92 % yoy) was the key dampener apart from flat fund-based income generation. The 25bps OPR cut had caused 9MFY20 NIM to decline by 10bps yoy to 2.38% (which is now in line with management’s guidance of 2.37%). Other key takeaways from the results: i) loan growth at 5.5% yoy; ii) 9MFY20 CIR rose 1.3pps to 48.2% yoy; and iii) net credit cost rose further from 22bps in 9MFY19 to 40bps in 9MFY20.

Lowering FY20-22 Earnings Forecasts by 5.9% / 4.0% / 3.2%

We lower our FY20-22E net profit by 5.9% / 4.0% / 3.2% as we factor in the impact of a 50bps OPR cut.

Maintain HOLD; PT Revised Down to RM2.40 From RM2.60

We maintain a HOLD rating, with a revised Price Target of RM2.40 based on a 0.6x P/BV target on the CY20E BVPS (from a previous PT of RM2.60), assuming a CY20E ROE of 7.7% and cost of equity of 9.2%. Our FY20E assumptions: NIM at ~2.3%, credit cost at 50bps, CIR at 48%. We remain cautious of ABM’s asset quality due to the rising GIL ratio in mortgages and personal financing. Another potential rate cut, expected in early March, certainly does not bode well for ABM’s earnings in the near term (with a permanent impact of 3bps on NIM for every 25bps OPR cut). Downside risks – higher credit defaults. Upside risks – more recoveries from AOA portofio.

Source: Affin Hwang Research - 5 Mar 2020