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HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 18 Jan 2019, 09:46 AM

 

AMMB Holdings - More Than a Simple NPL Sale?

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Management hosted a conference call yesterday and reassured investors that the price discovery for its RM554m non-performing loans were determined on an arm’s length basis. However, AMMB was unable to share further financial aspects of the deal with Aiqon Capital. While this move could bump up our FY19 earnings forecast by c.30%, recoveries in the future may be lesser. We see the decision possibly paving way for an M&A. Forecasts are left unchanged. Maintain HOLD and GGM-TP of RM4.70, based on 0.79x CY19 P/B.

NEWSBREAK

Legitimate arm’s length NPL price discovery. Management hosted a conference call yesterday to allay investors’ concern on its recent RM554m non-performing loans (NPLs) disposal to Aiqon Capital. Full reassurance was given that the price tag was determined on an arm’s length basis; there was a competitive auction process and Aiqon came out as the highest bidder. Besides, the disposal amount was within the valuation range of RM450m-RM750m as appraised by KPMG Corporate Advisory.

No colour on financial impact. AMMB reiterated the move was in line with its capital relief strategy. Management claimed it makes commercial sense to monetize its future collection after assessing against the costs and efforts needed to maintain these NPLs (via net present value test). That said, the downward adjustment quantum on the headline RM554m was not disclosed; we gathered this would hinge on any NPL collection from between the initial price discovery and the transaction’s cut-off date. As for further potential NPL disposals in the near term, management dismissed odds for the consumer portfolio since the Aiqon’s deal was already very comprehensive (537,068 accounts, mainly retail based) but did not rule out the business segment.

HLIB’s VIEW

Less recoveries in the future. For this instance, we are convinced there are no corporate governance issue as everything was conducted on a proper manner (to our best knowledge). Besides, we believe the final disposal amount should not deviate much from the RM554m, since it is only couple of months away from the targeted completion by 31 March 2019. However, this move to monetize its future collections would mean that future recoveries may be thinner. We estimate every 10bp increase in net credit cost could reduce our FY20-21 earnings forecasts by 6%. For now, we have pencilled in a net credit charge assumption of 8-9bp in our model. Note, recoveries narrowed in size by a 10% CAGR (from FY15-18).

M&A in the cards? While management said this was a capital relief move, we think it could be an exercise to clean up its books to pave way for a potential M&A. Recall, there were attempts in the past by both ANZ Banking Group and Tan Sri Azman Hashim (major shareholders) looking to dispose their stakes but failed.

Forecasts. Unchanged.

Retain HOLD and GGM-TP of RM4.70, based on 0.79x CY19 P/B with assumptions of 7.7% ROE, 9.0% COE and 3.0% LTG. This is below its 5-year mean of 1.01x and the sector’s 1.12x. The discounts are fair on the back of its lower ROE generation, which is 2-3ppt under its 5-year and industry averages. Risk-reward profile of the stock is balanced. Key positives are improving cost-to-income ratio and steady asset quality trend. However, we are still concerned of a potential upward normalisation of its net credit cost in the medium- and longer-term coupled with its high LDR of c.99%.

Source: Hong Leong Investment Bank Research - 8 Jan 2019

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