Alliance (ABMB)’s 9MFY18 performance is in line with our estimates, accounting for 76% of full-year estimates. No dividend declared as expected. Reiterate our MARKET PERFORM call but with a higher TP of RM4.25 due to traction in better RAR loans.

In line. 9M18 CNP of RM380.6m is in line with ours, making up of 76% of full year estimates but below consensus at 67%. In line results was due to better than expected NIMs despite loans contracting. No dividend declared as expected.

Higher margins due to better RAR loans. YoY, 9M18 CNP of RM380.3m slid by 3.6% on back of higher opex of +13.9% (due to transformation investments) and higher tax rate of 28%. Topline improved by 6.0% underpinned by broad based growth of fund-based income (+5.3%), fee-based income (+6.5%) and Islamic banking income at +7.6%. NIM continued to be strong, improving by 17bps (vs our estimation of 4bps) supporting fund-based income as loans contracted by 0.5% (vs expectations/system loans of 4-5%/+4.1%. Improvement of better risk adjusted returns (RAR) loans at +12.4% contributed to the better margins. CIR was at 49.8% (vs. industry/guidance/expectations of 48%/51%49%). YoY asset quality was mixed with GIL rising by 20bps to 1.2% with elevated credits charge at 19% (vs guidance/expectations of <30/26 bps) due to a one- off writeback.

QoQ, CNP was marginally flat, falling by 0.2% to RM122.6m attributed (i) to contracting topline at 1.5%, (ii) higher opex of 13.2% and (iii) higher tax rate by 5ppts to 32.2%. Loans saw marginal improvement at 0.3% with NIM compressed by 6bps to 2.32%. Due to writeback, there was a credit recovery of 8bps with asset quality stable at 1.2%.

Upside pressure on NIM. Despite the soft loans growth, we are encouraged with the traction in better RAR loans (9M18: 35% of total loans vs 9M17:30%. We expect NIM to be healthy moving forward with the focus on these loans (SME & Commercial, Consumer Unsecured, Share Margin and Alliance One Account). Such loans give better NIM and should support NIM going forward). Loans will be driven by Alliance One Account (AOA) which currently has >RM1.5b in the pipeline and expected to sustain into FY19. With LCR (above industry) and NSFR (above 100%) healthy, funding costs are receding and unlikely to put downside pressure on NIM. Management guided for a NIM improvement of 5bps for FY19. We do expect credit costs to achieve the management’s target of <30bps with their strategic 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.

Revised earnings upward. Post-results, we revised our FY18E/FY19E earnings by -1.6%/+4.9% to RM42m/532m. The higher revision is on account of higher loans and NIM offsetting the impact of higher credit charge under MFRS9.

Maintain MARKET PERFORM but revised TP. The TP is now at RM4.25 (from RM4,15) based on a blended PB/PE FY19E ratio of 1.19x/11.74x (0.5SD/0.5SD below mean on concerns of MFRS9 impact and soft loans) as we rollover our valuation to FY19E. Despite the soft loans, we are encouraged on the RAR loans gaining traction enhancing NIM. We reiterate our MARKET PERFORM call.

Source: Kenanga Research - 27 Feb 2018