The meeting last Friday lacks material positive developments to alter our view to be more bullish on the stock. Overall, we still find that management’s ROE target of c.9% would be difficult to achieve, especially since there is little room to optimize LDR, growing price-based rivalry for loans, thinning NPL recoveries, and slower domestic macro environment to aid growth. No changes were made to our forecasts. All in all, its risk-reward profile remains balanced as there were no compelling catalysts to re-rate the stock, despite being inexpensive. Retain HOLD and GGM-TP of RM4.25, based on 0.67x CY20 P/B.

Last Friday, management hosted a post-results meeting, whereby they divulged more on the bank’s outlook and strategic business initiatives for FY20.

Loans growth seen to pick up pace. Despite the muted loans growth so far (-1% QoQ), management expects it to pick up momentum, mirroring the expected GDP expansion of 4.5-4.7%. The aim is still to grow the MidCorp and Retail SME segments while strengthening the retail portfolio. To capture businesses with <3 years track record, AMMB adopts the ‘pay as you grow’ model via assessing their commercial flows through settlement terminals to gauge lending feasibility (as an alternative to monitoring repayment track record for more mature outfits). As for auto financing, management is still trying to prevent the contraction (-5% QoQ); they are already seeing pick-up in disbursements - c.RM250m/mth from RM150m/mth - more interest towards national cars.

Geared for additional rate cut. Management continued to guide FY20 NIM to be at c.1.85% (-4bp YoY). That said, given the challenging operating environment, they see that another 25bp OPR cut is probable, which in turn could shave its NIM by a further 2-3bp; although unfavourable, AMMB is one of the least impacted banks. To act as a mitigating factor, its bond book was deliberately sized and positioned to maximize the upside from rate cuts (as shown in 1QFY20, investment and trading income shot up 10% QoQ). Presently, management holds the view that government securities are crowded trades and is mulling the right time to lock profits (due to the temporary rate direction uncertainty created by the upcoming FTSE Russell review and outcome of BNM MPC meeting).

Low credit cost not sustainable. Notably, management raised its gross credit cost guidance upwards to 10-15bp from low single digit. We suspect this came as a result of weakening asset quality where GIL ratio nudged upwards to 1.66% (+7bp QoQ), no thanks to its residential mortgage, auto, manufacturing, and construction segments. Besides, the formation of new impaired loans has quickened (+31% YoY). That said, AMMB is working to resolve some lumpy NPLs with a potential to book net writebacks of RM50-100m in FY20. As for macro provisioning, management dropped hints there may be brief tailwinds given the recent strong domestic 2Q19 GDP numbers (+4.9% vs consensus estimate of +4.7%), giving rise to lower allowances pertaining to this.

Forecast. Unchanged since there were no material positive updates from the briefing.

Retain HOLD and GGM-TP of RM4.25, based on 0.67x CY20 P/B with assumptions of 7.2% ROE, 9.2% COE and 3.0% LTG. This is below its 5-year mean of 0.88x and the sector’s 1.05x. The discounts are warranted on the back of its lower ROE, which is 2ppt and 3ppt beneath both its 5-year and industry average respectively. In our view, management’s ROE target of c.9% would be difficult to achieve, especially since there is little room to optimize LDR, growing price-based competition for loans, thinning NPL recoveries, and slower domestic macro environment to aid growth.

Source: Hong Leong Investment Bank Research - 26 Aug 2019