Period  2Q14/1H14

Actual vs.Expectations The reported 6M14 net profit of RM906.5m (+10.1% YoY), accounted for 50% of both consensus and our full-year earnings forecasts of RM1.8b.

 Again, the earnings were boosted by writebacks of loan impairment of RM31.0m vs. provisions of RM28.3m in 1H13 despite the Group having proactively provided RM40m under doubtful sundry receivables for some of its clients’ exposure of approximately RM120m on the trading of Bluemont Group, Asiaons Capital and LionGold Corp. Ltd..

Dividends  Declared a single tier interim dividend of 7.2 sen vs. 7.0 sen in 1H13.

 Ex-date: 27/11/13 & payment date: 29/11/13.

 However, due to slowing business operations we believe the Group is likely to conserve more cash, hence we lower our FY14 full-year DPS estimate from 30 sen/share, which was based on 50% payout previously, to 24 sen/share or 40% payout, which is at the lower end of management guidance.

Key Results Highlights Net interest income grew 0.8% YoY but declined 4.4% QoQ. The weaker quarterly performance was due to a slight decline in QoQ loan growth of 0.6% (vs. YoY growth of 6.2%) We understand that the decline of loan was due to: (i) targeted/selective lending approach and (ii) single large repayments of corporate & institution loans. As such, the management has guided for lower loan growth of 7% as opposed to 10% previously.

 At the same time, NIM declined by approximately 10bps YTD as a result from margin pressure in retail loans. The cost-of-fund remained steady at approximately 3.08% due to reasonably steady CASA composition of 18.7% (vs. 1Q14: 20.6% & 4Q13: 19.9%). As total customer deposit grew slightly faster than loans at 1.1% QoQ or 6.3% YoY, the Net Loan to Deposit Ratio (“LDR”) dipped to 94.7% (vs. 1Q14: 96.4% & 4Q13: 97.3%).

 Non-interest income grew strongly at 44.3% YoY or 4.7% QoQ reflecting cross-selling and collaborative efforts across the Group after the integrations of Kurnia and MBF Cards.

 However, the acquisitions also saw higher expenses with cost-to-income ratio (CIR) remaining sticky at 47.1% in 2Q14 (vs. 1Q14: 47.0% & 2Q13: 45.6%.

 The further writebacks of RM10.6m in impaired loans (vs. writebacks of RM20.4m in 1Q14 & allowances of loan impairment of RM13.1m in 2Q13) has somewhat cushion the sticky CIR. We understand that the writebacks were due to some recoveries of corporate loans which are nonrecurring in nature.

Key Results Highlights The management has guided for normalisation in allowances of loan impairment, say 20bps in credit cost, in coming quarters. As of end-September 2013, the Group’s Gross Impaired Loans ratio stood at 1.9% (vs. 1.9% in 1Q14 & 2.3% in 2Q13). Loan loss coverage stood at 129.2% (vs. 132.2% in 1Q14 & 121.8% in 2Q13). The industry net impaired loan ratio and loan loss coverage registered at 1.4% and 97.6%, respectively, as of end-Sep13.

 Annualised ROE of 14.1% (vs. 15.3% in 1Q14 & 13.2% in 2Q14) was within the KPI of 14.0%-14.5%.

 Tier 1 and Total Capital ratios have improved to 11.21% and 14.94% from 10.40% and 14.09% in 1Q14 even after deducting for the proposed interim dividend, outperforming the management’s KPIs of 10.5% and 14.5% respectively.

Outlook  This set of results has reinforced our cautious sector view. As expected, the operating environment is getting more competitive and tougher.

 Loan growth momentum has shown sign of weakening while the historical low credit cost may not be sustainable and is poised to normalise in coming quarters. While banks have started to diversify their lending directions from the traditional household lending (mortgage and hire purchase) and SME to other segments such as share financing and corporate loans for better growth and asset yield, risk profile for such loans could be higher and tenure for such loans could be shorter as well. This could eventually translate into: (i) deterioration in asset quality and (ii) less sustainable in loans growth.

 Having said that, we believe AMBANK should be able to achieve both consensus and our FY14 earnings estimates of RM1.8b (+11%) due to relatively lower credit cost despite slower loans growth.

 Nonetheless, we still see potential lower earnings growth for FY15 owing to normalisation in credit cost coupled with lower loan growth.

Change to Forecasts

 We have fine-tuned our FY14 net earnings estimate from RM1,818.5m to RM1,813.7 (-0.3%).

 We have also lowered our FY15 net earnings estimate from RM1,993.1m to RM1,922.2 (-3.6%), which is ~4.5% below consensus estimate of RM2,012m.

 One of the major revisions in our estimates are the loan growth assumption, which is reduced from an average of 9% to 7.5%. We have also increased FY15 credit cost from 10bps to 20bps. However, these downside revisions are cushioned by our upgrade in non-interest income on the back of higher M&A synergies.

 Besides, due to slowing business operations, we also believe that the Group is likely to conserve more cash, hence we lower our FY14 full-year DPS estimate from 30 sen/share, which was based on 50% payout previously, to 24 sen/share or 40% payout, which is at the lower end of management guidance.

 Our estimates suggest FY14 and FY15 ROEs to register at 14.4% and 14.0%, respectively.

 These expectations also imply that the Group should be able to meet its FY14 ROE KPI of 14.0%-14.5% but might not be able to meet FY15 ROE KPI of 14.5%-15.5%.

Valuation  Inline with our earnings revisions, we have lowered (-4%) our Target Price from RM8.45 previously to RM8.10 based on ~13x FY15 PER or 1.7x FY15 PBV, which is in line with the 3-year price

multiples average.

Rating  While the stock has declined 7.7% since our downgrade in previous quarter and offer ~10% from here, we still maintain our MARKET PERFORM call due to our cautious sector view.

 Moreover, we believe there is risk for de-rating as the stock should only be priced at ~1.55x FY15 PBV with a backing of 14.0% ROE as per our regression study (Fwd. PBV = 17.87* Est. ROE – 0.96). Note that our target PBV of 1.7x PBV implies a potential Forward ROE of 15%.

Risks to Our Call (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