A boost from writebacks and recoveries

AMMB’s 1HFY17 PATAMI of RM675.6m (-6.4% yoy) was in line with our estimate but above the consensus. Fund-based income remained the dampener on pre-provision operating profit, while de-risking strategies have proven to be favourable, with credit recoveries boosting the bottom line. Maintain HOLD, with PT unchanged at RM4.30. A 1st interim dividend of 5 sen has been proposed.

1HFY17 PATAMI in line with Affin’s; weak fund-based income growth

AMMB reported a 1HFY17 PATAMI of RM675.6m (-6.4%yoy), which was within our expectations but above the consensus. At the operating level, AMMB’s 1HFY17 pre-provision operating profit (PPOP) was down 8.6% yoy as a result of lower fund-based income (-7.8% yoy) given a severe NIM compression of 18bps yoy, although this was mitigated by improved non-interest income (+18.3% yoy) arising from higher trading income in 2QFY17 (with realized investment gains).

The NIM compression of 18bps yoy (1HFY17: 1.93%) was a result of the: i) on-going portfolio rebalancing (cutting back on risky and low-return sectors, while growing the mass affluent, affluent, SMEs and corporate segments); and ii) repricing effect of the 25bps cut in the OPR. On a more positive note, AMMB’s COF management (reducing exposure to higher-cost deposits and CASAbuilding) and growing loans in preferred segments have helped to stabilize the NIM on a qoq basis. 1HFY17 operating expenses remained elevated (+7.4% yoy though on a qoq saw a 2.1% reduction) and have further driven up the cost-to-income ratio to 55.6% (vs. 1HFY16’s 52%).

De-risking strategies bearing fruit, implied by net credit recovery

AMMB’s net credit recoveries of 17bps (1HFY16: 12bps) are expected to continue in 2HFY17 as a result of management’s balance sheet de-risking strategies, prudent credit-underwriting standards and portfolio rebalancing. Positive traction has been coming from the retail portfolio and the group’s impaired loan ratio has seen a marked improvement of 31bps on a yoy basis, with the GIL ratio at 1.64% as at 2QFY17.

Maintain HOLD; Price Target unchanged at RM4.30

We maintain our HOLD rating, with our 12-month Price Target unchanged at RM4.30 (based on 0.77x P/BV). We have revised our EPS forecasts for FY17E/18E/19E by +2.8%/-4.2%/-8.8% to take into account weaker fundbased income growth (as margins stay depressed) and higher recoveries (with the exception for FY19E). We believe that the positive impact of AMMB’s “Top 4 Aspirations” on operations will gain traction over the years, though the impact is immaterial at present given the weak market conditions.

Downside and upside risks

Downside risks: i) substantial increase in the amount of allowances and erosion of capital ratios with the adoption of the FRS 9 standards, commencing 1 Jan 2018; ii) stagnant loan growth; iii) impact of de-tariff on the insurance business; and iv) competition from bigger investment banks; Upside risks: i) stronger growth in affluent retail, SME and corporate funding; and ii) improved efficiency, driven by the new core banking system implementation.

Source: Affin Hwang Research - 22 Nov 2016