With the absence of 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. Elevated credit charges should largely have been priced in for now and any weakness is an opportunity to buy. BUY with TP at RM3.30 based on a target FY20E PBV of 0.85x. 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).

Recall that 1QYFY20 earnings of RM77m came below expectation, caused by 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.

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.

In light of the impairment that has to be provided for the AOA (Alliance One Account) 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.

Source: Rakuten Research - 31 Oct 2019