4Q18 net profit of RM253.4m (+15.7 QoQ, -24.5% YoY), took FY18 earnings to RM1.13bn (-17.3%YoY) making up 80.6% and 94% of our full year forecast and consensus. A final dividend of 10sen was proposed, bringing FY18 dividend to 15sen. FY18 net profit declined weighed by (i) normalization of provision (- 107.2% YoY) (ii) spiking overhead expenses (+4.1% YoY) and (iii) lower NOII (- 4.6% YoY). We lower our net profit forecast in FY19 and FY20 by 8% and 4%. We revised our TP by 18% to RM4.00 as we moved our base year valuations and updated valuation parameters. We reiterate our HOLD rating derived from GGM of (i) COE of 10% and (ii) WACC of 8.5%.

Results below. 4Q18 net profit of RM253.4m (+15.7 QoQ, -24.5% YoY) took FY18 earnings to RM1.13bn (-17.3% YoY). The results came in below expectations, accounting for only 80.6% and 94% of consensus and our forecasts respectively. The weaker results was weighed by higher operating expenses incurred and normalizing loan-loss-provision due to lack of recoveries.

Dividend. Proposed final DPS of 10sen, bringing FY18 total DPS to 15sen (17.6 sen in FY17), translating to 40% payout or 4.2% yield.

QoQ. Despite elevated operating cost (which has resulted in opex rising by 9.8%), 4Q18 net profit rose 15.7% QoQ to RM253.4m and this was assisted by higher operating income emanated from both NII (+4.5%) and NOII (+4.3%), and RM50m lumpy recoveries.

FY18. The 17.3% decline in FY18 net profit (to RM1.13n) was weighed by (i) normalization of provision (-107.2% YoY), (ii) spiking overhead expenses (+4.1% YoY) and (iii) lower NOII (-4.6% YoY). Apart from RM146m spent on MSS (which was completed in Feb-18), AMMB incurred RM47m one-off expenses related to MBF merchant acquisition in CY2014. Net credit cost tapered-off as is within guidance as management hinted the tail end of recoveries.

Loans. Loan growth of 6% in FY18 (vs. 4.1% YoY in 3QFY18) outpaced system loan growth of 6%YoY. The growth was largely backed by the growth in mortgage (21% YoY) and business banking (1.8% YoY). Auto loan continue to moderate 1.6% YoY, whilst SME loan (newly ventured) showing good traction.

Deposits. Deposits recovered and posted a growth of 2% YoY (from -3.1% in 3QFY18) at the expense of expensive deposits. CASA growth was flattish at 2% QoQ to 21.3% from 20% in 3Q18. Despite rising expensive deposits composition, AMMB manage to defend NIM through portfolio balancing which lifted NIM by 2bps to 2.0%.

Asset quality. Making progress on asset quality, with absolute NPL reduced by 3% QoQ, resulting in GIL ratio declining to 1.7% from 1.86% at 3Q18. Improvement was seen in the wholesale segment and retail segment as GIL slid to 2.29% and 1.25% from 2.4% and 1.27% respectively.

Forecast. We lower our FY19-20 net profit forecasts by 8% and 4% respectively, largely to account for prolonged effect of MSS before the cost saving starts to kick in and higher credit cost assumption.

Maintain HOLD, TP: RM4.00. We revise our TP on AMMB lower by 18% to RM4.00 as we moved our valuation base year and updated our valuation parameters. TP is based on GGM of (i) COE of 10% and (ii) WACC of 8.5%. While valuations look attractive at current levels (0.7x P/B) we remain cautious on AMMB as it is in the midst of various clean-up activities.

Source: Hong Leong Investment Bank Research - 1 Jun 2018