Period  1Q15

Actual vs. Expectations AMMB’s 1Q15 core profit of RM329m (-29% YoY) came in below expectations, making up only 17%-18% of our and consensus’ full year estimates. Essentially, we stripped RM208m from its headline earnings to exclude a one-off divestment gain from AmLife & AmFamily Takaful.

Dividends  No dividends were declared during the quarter.

Key Results Highlights

1Q15 vs. 1Q14, YoY

 AMMB’s core profit fell 29%, no thanks to: (i) lower interest income (-7%), (ii) lack of recovery in impaired loans (-51%), coupled with (iii) expenses incurred on acquisition and business efficiency (RM73m vs 1Q14: nil).

 Interest income fell 7% as a result of a shift to a low yielding loans portfolio mix from the auto-financing (-4%) to mortgage (+8%) and wholesale (+4%) segments.

 Although current account savings account (CASA) deposits improved (+5%), cost of funds was still on the rise, causing net interest income (NII) to decline at a quicker pace (-12%). In turn, net interest margin (NIM) was compressed by 22bpts. Management explained that higher CASA rates were offered in anticipation of an overnight policy rate (OPR) hike in July (+25bpts to 3.25%).

 Overall, loans and deposits growth tapered to +2% and -1%, respectively, lifting loan-to-deposit ratio (LDR) by 2ppts to 101%. Loan growth was below expectations as opposed to management guidance of 9%, our estimate of 9%, and industry average of 9% as at end-June 14.

 Cost-to-income ratio (CIR) clocked in at 43%, which was inline our estimate. However, after stripping divestment gains from AmLife & AmFamily Takaful, the ratio would spike up to 58% (from 48% in 1Q14).

 On the upside, however, asset quality indicators were positive. Gross impaired loans ratio was flat at 1.9% while gross loan loss provision ratio felled 0.2ppts. In effect, loan loss coverage felled 12ppts, but still staying above the 100% mark.

 Annualised ROE contracted 5ppts to 9% (+1ppts to 15% if include the one-time divestment gains) while regulatory capital ratios were enhanced 1-2ppts across the board.

1Q15 vs. 4Q14, QoQ

 On the same note, quarterly core profit dropped by 29% due to the same reasons pointed out above.

 Similarly, interest income pulled back by 8% as loans shrunk 2% due to large lumpy repayments in the autofinancing

segment. Together with rising cost of funds, NIM eroded by 20bpts.

 LDR gained 1ppts as deposits declined at a faster pace (-3%) compared to loans (-2%).

 CIR was flat at 43% from 4Q14. Excluding divestment gains from AmLife & AmFamily Takaful, this ratio would have surged 15ppts to 58%.

 Asset quality indicators were intact, relatively unchanged from last quarter.

Outlook  We expect loan growth to taper on the back of moderating consumption trend. This can be observed from recent 2Q14 GDP numbers where the private consumption expenditure sub-component slowed down to 6.5% from 7.1% in 1Q14 and

6.8% in 2Q13 (YoY). Furthermore, management has revised down its FY15 loan growth expectation to 7% from 9%. We understand that large corporate loan from the oil & gas, infrastructure and agriculture sectors are expected to be drawn down later this year to make up for the lethargic 2% growth so far.

 Rising inflation along with higher cost of borrowing may exert pressure on asset quality. There could possibly be another 25bpts hike in OPR (to 3.5%) during the Monetary Policy Committee (MPC) meeting on 18 Sept. That said, management maintained its FY15 loan loss charge expectation at 30bpts and FY15 gross impaired loan ratio of below 1.9%.

 NIM pressure is expected to persist from stiff price-based competition for loan and deposit. Management reiterated its FY15 guidance on NIM to contract by 15bpts.

 Expectation on non-interest income as a percentage of total income is maintained at 38%. This segment will mainly be driven by strategic alliance with MetLife Inc to grow its general insurance business.

 Overall, AMMB kept its net profit growth targets for FY15 and FY16-FY17 at 10% and 9%-11% respectively. This includes a one-off RM208m divestment gain from AmLife & AmFamily Takaful. In turn, ROE targets were unchanged at 14.2%-14.5% in FY15 and 14.5%-15.5% in FY16-FY17.

 However, if we strip off the one-time divestment gain recorded this quarter, its FY15 core profit is expected to contract by 2%.

Change to Forecasts

 Given the lacklustre 1Q15 results along with a murky outlook ahead, we cut our FY15/FY16 core profit estimates by 9%/14% to RM1,676.4m/RM1,757.1m, respectively, from RM1,838.6m/RM2,049.6m. Essentially, we toned down our FY15/FY16 assumptions on: (i) NIM by 10-25bpts, (ii) loan growth by 2.5-3.0ppts, and (iii) non-interest income growth by 1-4ppts.

 In turn, FY15E/FY16E ROE could possibly drop to 12.3%/12.0% from our previous estimates of 13.4%/13.8%.

 For dividend, we forecast AMMB to declare DPS of 22-23 sen instead of 24-27sen previously estimated – this is in tandem with the downward revision in its core earnings. To note, we maintain the dividend payout ratio as per guided by management to dish out 40%-50% of its profits.

Rating Maintain MARKET PERFORM

Valuation  We cut our TP to RM7.02 from RM7.80 based on 1.4x CY15 P/B (previously pegged to 1.6x CY15 P/B). The lower P/B multiple is to reflect slower growth and lower ROE generation moving forward.

 Recall that the stock was traded at P/B of 1.6x for the past 2 years when it generated ROE of 14%. As a result, we now lower our P/B valuation yardstick.

Risks to Our Call

 Further margin squeeze from tighter lending rules and stronger-than-expected competition.

 Slower-than-expected loans growth and deterioration in asset quality.

 Rising credit charge as result of an up-cycle in non-performing loan (NPL).

Source: Kenanga