AMMB’s 1HFY18 net profit of RM660m (-2.4% yoy) was within consensus expectations but below our estimate (RM1.5bn, prior to revisions). The robust 1HFY18 fund-based income growth (+10% yoy), underpinned by NIM expansion of 6bps and loan growth of 6.6% yoy, was however negated by lower non-interest income, higher opex and a decline in credit recoveries. With management’s on-going investments in new business centres, new personnel and digital infrastructure, we believe that the group would be repositioned amidst competition. Maintain BUY with a lower 12-month PT of RM4.90 (from RM5.20).

Marginally Lower 1HFY18 PATAMI, Below Affin’s Estimate

AMMB reported a 1HFY18 PATAMI of RM659.7m (-2.4% yoy), supported by robust fund-based income growth of 10% yoy (with loan growth at 6.6% yoy; +0.3% qoq), though there were some minor offsets (such as noninterest income gains in 2QFY17 at the wholesale banking unit) and due to a decline in credit recoveries (from 52bps to 43bps). This was below our estimate (but within consensus) due to higher expenditure incurred on building the group’s capabilities (investment in new Enterprise Business Centres nationwide, hiring of new relationship managers and improving digital infrastructure). The improved NIM (+6bps yoy) was largely attributable to portfolio rebalancing initiatives and a lower funding cost from the cut in OPR as well as managing liabilities (through boosting CASA, redemption of debt securities on first call date). Qoq, net profit improved by 1% due to a lower effective tax rate and minority interest deduction.

GIL Ratio Remains Unchanged Qoq at 1.88%

As at Sept17, AMMB’s gross impaired loans amounted to RM1.74bn, with some major corporate accounts to the tune of RM1bn making up the bulk of it. Should these accounts be uplifted from impaired loan status, this could potentially lead to some credit recoveries, in our view. Loan loss cover, including regulatory reserves, stood at 101%.

Reiterate BUY, Price Target Lowered to RM4.90

We lower our FY18-20E net profit by 11.2%/ 6.4%/ 4.3% respectively, factoring in higher operating expenses of +11% for FY18E, +6% FY19E and +4% FY20E. We have a lower Price Target of RM4.90 (based on an unchanged 0.9x P/BV on CY18 BVPS), but reaffirm our BUY rating on AMMB. Our FY18-20E assumptions: i) credit costs 2.6-15bps; ii) NIM at 2.0% with liability management; and iii) 3-5% yoy loan growth.

Source: Affin Hwang Research - 29 Nov 2017