Period  2Q15/1H15

Actual vs. Expectations After stripping RM208m from AMMB’s 1H15 headline earnings (to exclude a one-off divestment gain from AmLife & AmFamily Takaful in 1Q15), its core profit of RM775m (-14% YoY) came in within our expectation but missed consensus, by forming 46% and 43% of respective full-year forecasts.

Dividends  An interim DPS of 12 sen (vs. 2Q14: 7.2 sen) was declared. Management explained that the higher DPS was due to a shift in 1H/2H payout ratio to 50%/50% vs. 30%/70% previously. Hence, a lower final DPS can be expected in 4Q15.

Key Results Highlights1H15 vs. 1H14, YoY

 The decline in core profit (-14%) was mainly due to: (i) lower interest income (-6%), (ii) weak contribution from its Islamic banking operations (-7%), and (iii) lack of recoveries from impaired loans (-44%).

 Contraction in interest income (-6%) came on the back of a shift to a lower yielding loans portfolio mix from auto-financing (-5%) to mortgage (+7%) and wholesale segments (+4%).

 Despite improving current account savings account (CASA) deposits (+4%), cost of funds was still on the rise, causing net interest income (NII) to decline at a faster pace (-10%). Consequently, net interest margin (NIM) was compressed by 13bpts.

 Overall, loans grew 1% while deposits decline 3%. In turn, loan-to-deposit ratio (LDR) surged 4ppts to 101%. Essentially, loans growth is below both our and management expectations of 6%-7%.

 Cost-to-income ratio (CIR) stood at 43% (-5ppts). However, if we were to exclude the one-time divestment gains from AmLife & AmFamily Takaful in 1Q15, the ratio would spike up to 51% (+3ppts).

 Asset quality was intact despite credit charge ratio rising 27bpts. Although gross impaired loans and gross loan loss provision ratio fell 16bpts and 42bpts, respectively, loan loss coverage (LLC) is still above the 100% mark.

 Annualised ROE shrunk 4ppts to 10% (+50bpts to 14% if include the one-time divestment gains).

 Regulatory capital ratios were enhanced 1-2ppts across the board.

2Q15 vs. 1Q15, QoQ

 Quarterly core profit expanded 36%, thanks to: (i) effective cost savings initiatives (-21%) and (ii) lower loan loss provision (-94%).  NIM expanded 15bpts on the back of the 25bpts OPR hike in July.

 LDR gained 60bpts as deposits declined at a quicker pace (-2%) compared to loans (-1%).

 CIR increased 2ppts to 44% but if we exclude the divestment gains from AmLife & AmFamily Takaful, this ratio would have fallen 14ppts from 58% instead.

 Similarly, asset quality indicators were intact. Notably, gross impaired loans and credit charge ratio declined 9bpts and 35bpts respectively, while LLC is at 118%.

Outlook  We expect loans growth to taper on the back of: (i) moderating consumption trend and (ii) its already high LDR of 101%. Supporting our view, management had revised down its FY15 loans growth expectation to 3% from 7%.

 Given rising inflationary environment coupled with the increase in borrowing cost (as a result of the 25bpts hike in OPR on 10 July), delinquency rates may rise and exert pressure on asset quality. That said, management lowered its FY15 loan loss charge expectation to 15bpts from 30bpts as they expect more impaired loans recoveries in 2H15. Guidance for gross impaired loans ratio of below 1.9% for FY15-FY17 was maintained.

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

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

 Overall, AMMB lowered its net profit growth targets for FY15 and FY16-FY17 to 8% (from 10%) and 6%-10% (from 9%-11%), respectively – this includes a one-off RM208m divestment gain from AmLife & AmFamily Takaful. In turn, ROE targets were cut to 14% for FY15-FY17 from 15%.

 However, if we strip off the one-time divestment gain recorded in 1Q15, AMMB’s FY15 core profit is expected to contract by 4%.

 Dividend payout ratio of 40%-50% for FY15-FY17 was maintained.

Change to Forecasts

 No change to our forecasts since 1H15 results were largely in line. We maintain our FY15/FY16 core profit estimates of RM1,676m/RM1,757m.

 To note, our FY15/FY16 estimates were already 6%/9% below consensus.

Rating Maintain MARKET PERFORM

Valuation  Our TP of RM7.02 based on 1.4x CY15 P/B is unchanged. 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 have a lower 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