Alliance (ABMB)’s 1HFY18 performance is in line with our/market estimates, accounting for 52%/46% of full-year estimates. Interim DPS of 8.5 sen declared and within expectations. Reiterate OUTPERFORM due to traction in better RAR loans coupled with a decent dividend yield of 4.0%.

In line. 1HFY18 CNP of RM257.3m is in line with both our/market estimates, making up at 52%/46% of full-year estimates despite falling YoY. The in-line result was due to: (i) better-than-expected NIM despite flattish loans and (ii) better operational efficiency with lowerthan-expected CIR. No surprise of an interim dividend of 8.5 sen declared (in line).

Stellar NIM. YoY, 1HFY18 CNP of RM257.3m slid by 3% due to: (i) opex rising by +9% (due to transformation investments), and (ii) higher impairment allowances of 76%. Top-line improved +8% (mitigating the slide) equally supported by strong fund-based income (+8%), Islamic banking income (+7%) and fee-based income (+9%). Fund-based income was supported by: (i) strong NIM of 2.3% (improved by 19bps vs. our expectations of 4bps improvement) despite loans marginally flat (vs expectations/industry of 4-5%/5.2%) and (ii) higher better RAR loans (+12%) which gave better margins. CIR was at 47% (vs. industry/guidance/expectations of 48%/51%49%). YoY asset quality deteriorated with GIL rising by 30bps to 1.2% and elevated credits charge at 33% (vs guidance/expectations of 35/26 bps). QoQ, 2QFY18 CNP fell 9% dragged by: (i) higher opex (+8%) and (ii) higher impairment allowances (+11%). QoQ top-line of +2% was offset by fall in feebased income (-6%) with fund-based income improving at +6% and flattish Islamic banking income. Loans were flat but improving NIM by 12bps to 2.4% drove fund-based performance. Credit costs were up 3bps to 0.31%.

Upside pressure on NIM. Despite the soft loans growth, we are encouraged with the traction in better RAR loans. We expect NIM to be healthy moving forward with the focus on better RAR loans (SME & Commercial, Consumer Unsecured, Share Margin and Alliance One Account). Such loans give better NIM and should support NIM going forward). With LCR (above industry) and NSFR (above 100%) healthy and LDR at 91%, funding costs are receding and unlikely to put downside pressure on NIM. Despite the elevated credit costs, we expect credit costs to achieve the management’s target of <30bps with easing of mortgage loans. We are also encouraged with its guidance of <25% on existing provisions on day 1 of MFRS9 impact coupled with its ratio of unsecured loans (<12% of total loans) minimising the expected elevated impact of MFRS9 in FY19.

No change in earnings. Post-results, we keep our FY18E/FY19E earnings unchanged at RM499m/507m as our assumptions are conservative enough.

Maintain OUTPERFORM and TP. The TP RM4.15 is based on a blended PB/PE ratio of 1.19x/11.74x (1SD/0.5SD below on concerns of MFRS9 impact and moderate loans) as we rollover our valuation to FY19E. With better RAR loans gaining traction enhancing NIM supporting earnings coupled with a decent dividend yield of 4.0% (on par with industry average) we reiterate our OUTPERFORM call.

Downside risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 4 Dec 2017