Alliance Bank Malaysia Berhad - Initiation
Tue, 03-Dec-2024 07:23 am
by Samuel Woo • Apex Research

Counter

ABMB (2488)

Target Price (RM)

5

Recommendation

Hold

Investment Highlights

 

  • High loan growth potential and aggressive market share take-up.  ABMB is expected to continue growing loans at an elevated pace – repeatedly reporting one of the highest loan growth figures among listed peers. We see no signs of this stopping, with selected economic corridors still providing ample room for loan and deposit growth. Admittedly, the impact on pre-provisioning operating profit is not as pronounced, offset by a sharp elevation of OPEX recently – but as OPEX normalises, the benefits from loan growth on the bottom line should be clear. 

  • While recovery has been gradual, this revamp is well-timed with the economic cycle: Expect sharper fee income growth spurred on by better economic prospects. More importantly, ABMB’s improved functions should allow the Group to handle the increased load from larger, more prominent deals from its partnership with the Sarawak government.

 

  • A healthier, more diversified loanbook. ABMB’s previous operating model relied on high-risk, high-yielding loans – namely their AOA loans (mortgage refinancing) – to maintain a high level of profitability. This was their niche as a small bank, unable to compete with larger peers head-to-head. However, following heavy impairments during the pandemic, ABMB have since switched their focus to safer, lower-yielding loan segments (most notably, end-financing mortgages) – and are willing to sacrifice their NIMs to do so. We think the trade-off for lower provisioning makes it worthwhile.

 

  • Larger exposure to client-based NOII contributions aligns well with aggressive market share capture. The brunt of ABMB’s NOII contribution (usually >80%) comes from client-based income (Wealth management is the largest contributor, followed by forex fees and trade fees). The remainder comes from non-client-based income – namely treasury contributions (i.e. mark to market and forex gains). Rule of thumb: if non-client-based income doesn’t report a net loss in the quarter, it is considered a satisfactory performance.

 

  • Cross-selling from other lines of business is crucial in growing client-based contributions – usually, borrowers are the segment most commonly tapped into. Hence, the high loan growth direction taken by ABMB is ideal, as it builds up the client base for these forms of fee income very quickly, ensuring a steady, strong build-up in client-based income flows. 

 

  • Cost of funds is still highly efficient, despite smaller size. Being a smaller bank usually implies a weaker deposit franchise – making it harder to acquire adequate funding (at a decent price) for high-asset-growth strategies. However, ABMB seems to have handled this issue very well, reporting relatively low COF relative to its size and current level of asset growth. The main driver of efficiency is its high CASA levels, coming from business-related operating accounts and SavePlus tiered current accounts for individuals.

     

Valuation & Recommendation

  • We initiate coverage on ABMB with a HOLD recommendation and a target price of RM5.00 based on an FY26F PBV of 0.95x GGM-PBV valuation. (GGM Assumptions: FY25F ROE of 9.8%, LTG of 5.0%, & COE of 10.1%.) Following the recent share price run-up, we think ABMB is priced in for now.

 

  • We favour ABMB for its (i) High loan growth potential and aggressive capturing of market share, (ii) Its ongoing loanbook rebalancing, which has already resulted in a safer asset quality profile, (iii) Potential for client-based NOII contribution growth, given its aggressive market share capture, (iv) Efficient cost of funds, despite being a smaller bank.
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