AMMB’s 2QFY19 net profit of RM348.2m (+5.0% yoy, flat qoq) and 1HFY19 net profit of RM695.7m (+5.5% yoy) came in broadly within our and consensus estimates. The group’s operating leverage continued to improve, largely driven by a sharper decline in overheads (-9.0% yoy). 1HFY19 cost-to-income ratio at 50.4%, against 57.2% in 1HFY18, resulted in positive JAWS of 10.5% for 1HFY19. Despite seeing positive traction in 2QFY19 loans (up 7.5% yoy; +1.6% qoq), overall funding cost continued to rise, resulting in further NIM compression of 9bps qoq to 1.91%. We see key earnings risks coming mainly from NIM pressure due to rising deposit competition and normalizing of credit charges. Maintain HOLD, our Price Target of RM3.70 is unchanged (at a 0.68x CY19 P/BV target).

1HFY19 Results Broadly In-line With Our and Market Expectations

AMMB reported a 1HFY19 PATAMI of RM695.7m (+5.5% yoy), on the back of lower operating expenses (-8.7% yoy) and marginal net operating income growth (+1.8% yoy). 1HFY19 fund-based income saw an expansion of +4.1% yoy but non-interest income was lower, down 10.7% yoy. Though AMMB saw negligible net credit charges (5bps) in 1HFY19, credit cost is expected to normalize in the coming quarters in the absence of significant recoveries. As at 2QFY19, loans grew by 7.5% yoy (ahead of industry growth of 5.7% yoy) and 1.6% qoq, driven by growth in mortgages, and business and SME loans.

Potential Challenges – NIM Pressure, Declining Credit Recoveries

Though AMMB saw a marginal 1HFY19 NIM compression of 2bps yoy to 1.97%, in our view, margin pressure could possibly rise in 2HFY19 due to more intense competition for deposits and potential price-discounting. Meanwhile, credit charges should continue to normalize as recoveries have tapered off.

Maintain HOLD and Price Target of RM3.70

Maintain HOLD and Price Target of RM3.70 (based on 0.68x P/BV on CY19 BVPS). Though we see clearer skies for AMMB in FY19, post an organizational restructuring and remodelling of business strategies, there are still concerns relating to sustainability of its competitive edge. We believe that the positive results anticipated have been priced-in. Downside risks: i) deterioration in asset quality; ii) competition from bigger banks. Upside risks: i) expansion in NIM.

Source: Affin Hwang Research - 23 Nov 2018