4QFY18 net profit is in line, driven by stronger insurance income and higher NIM from the recent OPR hike. The group has also completed its MSS which should help to partially offset higher provisions moving into FY19. Despite a commendable revenue growth, we remain vigilant about sharply lower recoveries which could pose a downside earnings risk. Maintain HOLD and target price of RM3.80 (7.2% ROE, 0.65x FY19F P/B). Entry price: RM3.40

RESULTS

• 4QFY18 results in line. AMMB Holdings (AMMB) reported 4QFY18 core net profit of RM341.2m (+46.3% yoy, +74.9% qoq), broadly in line with FY18 core earnings and representing 102% of our full-year estimates. There was a one-off RM146m one-off cost relating to its recent mutual separation scheme (MSS) scheme. Stronger insurance income from lower claims, higher NIM of 4bp from recent OPR hike and good cost discipline drove 4QFY18 yoy growth. On a full-year basis, core earnings expanded 2.0% yoy as a commendable 15.4% yoy growth in pre-provision operating profit was largely offset by sharply lower net recoveries that declined from RM173.5m in FY17 to RM1.1m in FY18. Earnings improved a sharp 74.9% qoq, mainly driven by a write-back in lumpy provision made in 3Q18 which led to a sharp reversal in provisions from a positive provision charge of RM80.9m in 3Q18 to a net write-back of RM29.1m in 4Q18.

• Provision normalising upwards from a low base. The release of excess macro prudential provision buffers has helped the group sustain net write-backs in FY15-18. However, the macro prudential provision buffers residing in the balance sheet have declined from a peak of RM254m in FY16 to FY18’s RM49m balance, which it seeks to maintain. As such, moving into FY19, the group is unlikely to benefit significantly from significantly from any such release which would have led to a significant upward normalisation in net credit cost. Note that the group’s gross credit cost currently hovers at 47bp. We have pencilled in a 12bp/15bp net credit cost assumption for FY19/20. The implementation of MFRS9 could see further upside risk to our provision estimates. Assuming loan recoveries declines faster than expected and leads to a more sustainable 20bp net credit cost, our ROE assumption for FY19 could decline to 7.1% from our current 7.6%.

• Asset quality remains benign. Overall gross impaired loans were relatively stable, declining 2.4% qoq. Gross impaired loans ratio was relatively stable at 1.70%. The group is focusing on stronger asset quality loans category such as residential property as it aims to maintain a stable asset quality outlook. Based on its internal models, management believes that its current loans-loss coverage ratio inclusive of regulatory reserve ratio of 101.5% adequately builds in any incremental increase in day 1 provision required under MFRS9. As such, impact to current CET1 of 11.3% should be fairly neutral on the MFRS8 implementation which the group will be adopting in FY19.

EARNINGS REVISION/RISK

• None.

VALUATION/RECOMMENDATION

• Maintain HOLD and target price of RM3.80 (7.2% ROE, 0.65x FY19F P/B). Despite a commendable revenue growth, we remain vigilant of sharply lower recoveries which could pose a downside earnings risk. Entry price is RM3.40.

Source: UOB Kay Hian Research - 1 Jun 2018