KUALA LUMPUR (June 22): Kenanga Research said the current fundamental outlook and prevailing macro climate could present more palatable opportunities for AMMB Holdings Bhd (AmBank) to engage in merger and acquisition activities.

The research house in a note on Thursday (June 22) maintained an “outperform” call, and a Gordon growth model (GGM)-derived price-to-book value (PBV) target price (TP) of RM5.05, while tagging a cost of equity ratio of 10.7% higher than return on equity of 9.5% on AmBank.

“AmBank had been said to be in talks with several financial institutions (including RHB Bank Bhd and Grab) over the past few years. The failure thus far for any deal to materialise could be attributed to: (i) impasse regarding pricing, and (ii) changes in operating environment.

“However, considering the factors below, we opine that the prospects for talks of consolidation could now be brighter,” it said.

Kenanga further explained that following Covid-19 restrictions in 2020, the banking sector was marred by moratoriums and repayment assistance programmes, resulting in deterioration in asset quality and slowing economic activities.

“At present, we believe a sense of confidence has been reinvigorated in this space, particularly as impairment needs have rationalised. While loans growth may see some challenges in line with GDP expectations, we opine its resilience has been proven,” it added.

Kenanga’s projected AmBank’s earnings per share (EPS) growth of 7% and 10% for FY2024F and FY2025 respectively is reflective of such readings, while ROEs are expected to linger close to 10%, higher than pre-pandemic levels.

Kenanga noted that the group’s RM2.83 billion one-off global settlement payment to the Ministry of Finance in 2021 affected Ambank’s forward PB valuations, which dropped to its lowest point at 0.55x in July 2021.

“The heightened uncertainties then even alluded that AmBank would require a further discount for a [M&A] deal to occur.

Kenanga said AmBank had reverted to historical levels of 0.70 times forward PBV from a sectorwide de-rating, owing to unfavourable developments in the global banking scene. It said a 0.70 times forward PBV valuation price tag would be a more “acceptable price” for stakeholders.

“A premium from this could also be applied for the group’s increasing presence in the fast-growing SME space. Arguably, AmBank is also more fundamentally sound now, with cost-income ratios staying below 50% (as compared to pre-Covid averages of 60%),” said the research firm. Australia and New Zealand Banking Group Ltd (ANZ) and Tan Sri Azman Hashim owns a 21.68% and 11.83% stake respectively in AmBank.

Kenanga said while the M&A discussion provides a more speculative angle for the stock, it believe that the group could do well fundamentally as a key beneficiary of the economic recovery, from its notable SME loans profile (21%) with asset quality concerns on household sector aside.

The group, which is the country’s sixth largest bank by assets, also seeks to enjoy a better long-term growth trajectory from more aggressive partnerships against its peers, added the house.

Kenanga said risks to its recommendation included higher-than-expected margin squeeze, lower-than-expected loans growth, worse-than-expected deterioration in asset quality, slowdown in capital market activities, unfavourable currency fluctuations, and changes to the overnight policy rate (OPR).

AmBank shares settled at RM3.65 during the morning trading session on Thursday, up five sen or 1.4%, valuing the group at RM12.1 billion.