The meeting yesterday demonstrated management depth with their well thought of strategies but a lot still needs to come to fruition (esp. lifting ROE) before the investment community can be fully acknowledge and reward their efforts. Key takeaways were: (i) deposits still have legs to reprice downwards, (ii) realizing its FVOCI gains need more consideration, (iii) asset quality regressing with NCC ticking up, and (iv) employing multiple ROE enhancement moves. 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 cheap. Retain HOLD and GGM-TP of RM4.25, based on 0.67x CY20 P/B.

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

Deposits repricing still have legs. The average duration for fixed deposits is about 8 months and thus by Dec-19, almost all of these should be priced downwards (seeing the 25bp OPR cut was back in early May-19). We gathered net interest margin (NIM) was still widening in Oct-19 but guided to be flattish YoY at 1.90% for FY20; AMMB is conservative, factoring some Oct-Dec seasonal deposit competition and another 25bp OPR cut by end Mar-20.

Taking FVOCI unrealized gains to P&L? AMMB posted 1HFY20 unrealized gains of c.RM180m (vs 1HFY19: RM0.5m) on financial investments at fair value through other comprehensive income (FVOCI). In general, these were bought and held to generate recurring yields. For now, nothing concrete but management shared that they will only monetize, if only the gains can cover 36 months of the FVOCI’s net interest income.

Asset quality regressed with NCC ticking up. Asset quality deteriorated in 1HFY20 with c.RM900m new impaired loans formation (+45% YoY): RM200m were related to Wholesale Banking (WB), RM50m Business Banking (BB), and RM650m were spread across different loan categories. In WB, RM100m came from a single manufacturing company (50% provided with strong collaterals) while the balance was made up by 4 accounts (80% provided). In BB, it consisted of 5 bad customers (c.50% provided). Overall, FY20 net credit cost (NCC) was guided to be 15-20bp vs 1HFY20: 12bp and management shared a more normalized figure is 30bp.

ROE enhancement efforts. FY20 ROE target was cut to 8-8.5% from c.9% as AMMB originally believe that they can liquidate some non-core businesses and offload some intangible assets (c.15% of equity is goodwill). However, it is too late to work out and close any deals since it is already Dec-19. Other efforts to raise this over the medium to longer term include: (i) expand its Retail Banking (ROE here is c.6% vs other segments like WB & BB at c.11%) through stabilizing its auto books while growing mortgages for secondary market, priority banking, retail SME loans and CASA, along with (ii) freeing capital under the internal ratings-based (IRB) approach to optimize risk-weighted assets (RWA), which could be rollout as early as middle of next year. We understand IRB approach can potentially release RWA by 5% and in turn, we estimate CET1 ratio to improve by c.60-70bp.

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

Keep 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 0.84x and the sector’s 1.00x. The discounts are warranted given its weak ROE output, which is 2ppt and 3ppt beneath both its 5-year and industry average respectively. All in all, its risk reward profile remains balanced, since there are no compelling catalysts to re-rate the stock, despite being inexpensive.

Source: Hong Leong Investment Bank Research - 4 Dec 2019