In our last results report on ABMB (dated 28th Aug), we highlighted that its 1QFY20 earnings disappointed on higher-than expected provisioning due mainly to the default of a corporate bond and badly performing loan accounts for which 13 bps in credit charge was provided. Credit charge is likely to remain elevated at such level for 2QFY20 – this time, on impairment of mortgage loans in its Alliance One Account (AOA) portfolio. However, on the bright side, 2QFY20 earnings will be shored up by the absence of extra provisioning associated with the defaulted corporate bond that marred 1QFY20 earnings. With the absence of similar write-offs and sharply lower credit charge expected in the 2HFY20, better days are ahead even in the event of a rate cut in November where we pencilled in a 10 bps NIM compression. All in we cut FY20E earnings by 8% with a lowered TP of RM3.30. Elevated credit charges should largely have been priced in for now and any weakness is an opportunity to buy. Maintain OUTPERFORM. Another quarter of elevated impairment charges. Recall that 1QYFY20 earnings of RM77m came below expectation, caused by not so much as NIM compression nut higher impairment allowance where RM55m was charged representing about 13 bps on top of RM50m written off for a defaulted corporate bond. The range of gross credit charge for ABMB is typically 35 – 40 bps in a normal year. Management guided that credit charge for 1HFY20 would ball park at around 26 – 28 bps, which implies that 2QFY20 should remain elevated at c.13bps on higher mortgage loan impairments. We pencilled in 42 bps for the full year – translating to RM180m, on expectation that 2HFY20 will see a sharp reduction in credit charge as the bank work on these R&R housing loans.

NIM compression from May OPR cut works its way through 2QFY20. Management guided for a RM40m impact from the 25bps OPR cut in May which translates to a NIM compression of c.9.5bps. Given the time lag of 1-2 quarters for the OPR cut to fully impact NIM compression, 2QFY20 should likely suffer a RM20m impact by our estimate versus RM8m in 1QFY20.

Earnings revised. In light of the impairment that has to be provided for the AOA mortgage loans in 2QFY20 and RM50m defaulted bond which we opined will probably be settled only in FY21, we cut FY20E earnings by 8% to RM487m. Despite this, we believe, that 2QFY20 would sequentially be a better quarter in the absence of the extra provisioning on the defaulted bond. Our assumptions for FY20 are maintained; i) loans at +6%, ii) credit costs at 42bps, iii) NIM compression at -10bps, and iv) CIR of 48%.

TP lowered but call maintained. TP lowered to RM3.30 (from RM3.45) based on a target FY20E PBV of 0.85x (from 0.89x previously) implying a -1.5SD below its 5-year mean. The stock has dipped below its 5-year mean giving it an attractive dividend yield of >5% (vs. its peers’ average of 4.5% and second only to MAYBANK). Elevated credit charges should largely have been priced in now and any weakness is an opportunity to buy, we reiterate our OUTPERFORM call.

Risks to our call are: (i) higher-than-expected-margin squeeze, (ii) lower-than-expected loans/financing growth as well as (iii) worse-than expected-deterioration in asset quality.

Source: Kenanga Research - 31 Oct 2019