Period    1Q14/3M14

Actual vs. Expectations   The reported 1Q14 net profit of RM467.9m (+5.6% YoY or +15.1% QoQ) is within expectations. It accounted for 25.7% of both consensus and our earnings forecasts of RM1.8b.

Dividends   No dividend is proposed / declared as expected. However, we understand that the Group could pay out 40%-50% of its earnings as dividends. 

Our FY14 full-year DPS estimate of 30 sen/share is based on 50% payout. 

Key Results Highlights  Net interest income grew 2.3% YoY but declined 3.1% QoQ. The weaker quarterly performance was due to a slower QoQ loan growth of 1.8% (vs. YoY growth of 9.8%) coupled with a decline in NIM by 3bps within the quarter due to margin pressure in retail loans. While the YoY loan growth was within our expectations and management guidance of 10%, we notice that the loan growth momentum has somewhat weakened especially in the mortgage segment (-2.0% QoQ but +5.5% YoY). At the same time, the cost-of-fund remained steady at approximately 3.09% due to better CASA composition of 20.6%(vs. 4Q14: 19.9%, 1Q13: 17.8%). Net Loan to Deposit Ratio (“LDR”) also remained relatively flat (1Q14: 96.4%, 4Q13: 97.3%, 1Q13: 94.8%).

Non-interest income grew steadily at 20.1% YoY or 13.0% QoQ driven by fees and insurance business despite a decline in trading & investment income by RM26.8m from RM73.3m in 1Q13 arising from the rapid rise in bond yield in June 2013.

While the cost-to-income ratio (“CIR”) improved to 47% in 1Q14 from 50.7% in 4Q13, it is still way above 42.5% in 1Q13. The sticky CIR was due to the Group’s strategic investments for growth, especially in its insurance and credit card segments.

The writebacks of loan impairment of RM20.4m (vs. allowances of loan impairment of RM75.8m and RM15.2m in 4Q13 and 1Q13 respectively) had somewhat cushioned the sticky CIR.  While we believe this was inline with the improved Gross Impaired Loans Ratio of 1.9% in 1Q14 (vs. 2.0% & 2.4% in 4Q13 & 1Q13 respectively) and higher loan loss coverage of 132.2% (vs. 129.3% and 117.0% in 4Q13 and 1Q13), we believe the credit charge/ratio should normalise in coming quarters.

Annualised ROE of 15.2% (vs. 13.7% in 4Q13 and 15.7% in 1Q13) was higher than the KPI of 14.0%-14.5%. Tier 1 and total capital ratios were also relatively stable at 10.83% and 14.52%, within the management’s KPIs of 10.5% and 14.5% respectively.

Outlook  We believe AMBANK should be able to achieve consensus and our FY14 earnings estimates of RM1.8b (+11%) which is in line with the management KPI of 10%-12%. 

Coupled with our 50% dividend payout assumption, we estimate AMBANK to register a ROE of 14.6%, which is also in line with its KPI of 14.0%-14.5%.

Our other major assumptions are: (i) NIM to contract by 5bps (vs. 11bps in FY13 and management guidance (“MG”) of <10bps), (ii) gross loan growth of 8.9% (vs. FY13: 8.9%, MG: 10%), (iii) Loan loss charge expected to be 11bps (vs. FY13: 21bps, MG: <30bps); and (iv) CIR of 46.7% (vs. FY13: 48.1% and MG: 44%).

Change to Forecasts   We maintain our FY14 net earnings estimate at RM1,818.5m (+11.2% YoY).

We also introduce our FY15 net earnings estimate of RM1,993.1m (+9.6% YoY), which is slightly below consensus estimate of RM2,027.4m.

Valuation   While we make no changes to our FY14 estimate, we are raising our Target Price from RM7.90 to RM8.45. 

This is because we believe the stock is being re-rated as it delivers consistent net profit growth of approximately 10% for the last 2 years (FY12: 10.5%, FY13: 10.2%) and potentially over the next 2 years (FY14e: 11.2%, FY15e: 9.6%).

At RM8.45, it is valued at 2.0x FY14e BPS of RM4.30 or 14.0x FY14e EPS of 60.3sen. Both of these price multiples represent +1SD above the average since early-2008. This valuation also represents 1.8x FY15e PBR or 13.0x FY15e PER.

Rating  Downgrade to MARKET PERFORM (from OUTPERFORM previously)  even based on our revised TP of RM8.45, as the share price has  outperformed FBMKLCI by 8.95% on YTD basis. However, we would review our call should the share prices stage corrections.

Risks   (i) Tighter lending rules and slower loan growth, (ii) keener competitions and hence further margin squeeze; and (iii) sharp turning in NPLs hence higher credit charge.

Source: Kenanga