• 3QFY21 net profit came in at RM100.5m (-25% yoy; -3.4% qoq), while 9MFY21 net profit stood at RM308.7m (-5.4)% yoy. Results (on an annualized basis) were below Affin’s but within street estimates
• 9MFY21 expected credit loss (ECL) allowance remained elevated (+127% yoy) as management continued to build-up pre-emptive buffers in 3QFY21. The annualized net credit cost stood at 140bps in 3QFY21 vs. 137.6bps in 2QFY21
• Management is planning to raise full year NCC to 120-125bps (from 100bps). We cut FY21E net profit by 5.5%. Upgrade ABMB from Sell to HOLD, with a revised 12-month PT of RM2.62

3QFY21 net earnings -25% yoy and -3.4% qoq as provisions remain elevated

Alliance saw a marginally lower net profit (-3.4% qoq) in 3QFY21 as provisions stayed elevated with net credit cost (NCC) at 140bps (90% for BAU provisions). Meanwhile, 9MFY21 net profit was down 5.4% yoy as the positive growth in pre-provision profits (+23% yoy) was eroded by a 127% increase in provisions (equivalent to an annualized NCC of 122bps; out of which, 56% is for management overlay). 9MFY21 fund-based income was lacklustre (+1.4% yoy) due to impact of the rate cuts but non-interest income (+40.8% yoy) was underpinned by robust treasury and investment gains as well as a gradual pick up in FX/banking fees. Alliance saw 9MFY21 NIM down 12bps yoy to 2.23%, while on a qoq basis, held up at 2.26%. Group loan growth remained subdued, down 0.8% yoy, due to some pullback in the corporate loans (-7.4% yoy), while consumer and SME loans grew by +0.4% and 3.8% yoy respectively.

Building Up More Provision Buffers, in the Event of a Spike in NPLs

Management has guided for a higher NCC target of 120-125bps (from 100bps previously) as a matter of prudence in case NPLs start creeping up subsequent to the expiry of the targeted assistance program (TAP) by June 21. As at Dec20, the outstanding loans under the TAP stood at RM6.3bn or 14.6% of loans outstanding (increased from 11.4% in Sept20). LLC meanwhile, has seen a decline from 109.6% to 101.1% as at Dec20.

Upgrade to HOLD, though Price Target is lowered to RM2.62 (from RM2.72)

We upgrade our rating from Sell to HOLD on Alliance (on valuation grounds). However, our PT is lowered from RM2.72 to RM2.62 as we trim FY21E’s net profit by 5.5% due to a higher NCC assumption of 125bps (from 100bps previously) while raising non-interest income further. Our TP assumption is based on a 0.52x P/BV on CY21E BVPS, a CY21E ROE of 6.2% and cost of equity of 8.2%. Our FY21E/22E23E underlying assumptions: loan growth 0%/2%/3% yoy, CIR 42%/43%/44%. NCC 125bps/102bps/92bps. Downside/upside risks: cut/hikes in interest rates; increase/decrease in default rates.

Source: Affin Hwang Research - 1 Mar 2021