Period  3Q15/9M15

Actual vs.Expectations Excluding the one-time divestment gain from AmLife& AmFamily Takaful in 1Q15 (RM208m), 9M15 coreprofit of RM1,191m (-10% YoY) missedexpectations, representing only 71% and 67% of ourand streets’ full-year estimates, respectively.

 The shortfall was mainly due to: (i) a pullback ininterest income growth (-7% YoY) and (ii) weakincome contribution from its Islamic banking unit (-8% YoY).

Dividends  As expected, no dividends were declared. Typically,payout is in March and September.Key

ResultsHighlights

9M15 vs. 9M14, YoY The fall in core profit (-10%) can be attributed to: (i)lower interest income (-7%) and (ii) weak Islamicbanking operations (-8%).

 A shift in loan portfolio mix from auto-financing (-9%)to mortgage (+7%) and wholesale segments (+7%)caused interest income to shrink (-7%).

 Although current account savings account (CASA)deposits grew by 7%, competition in the market haddrove up cost of funds, causing net interest income(NII) to decline at a quicker pace (-11%). In turn, netinterest margin (NIM) was down by 16bpts.

 Loans growth was lethargic at 1% while depositsgrew 3%. As a consequence, loan-to-deposit ratio(LDR) fell by 2ppts. Notably, its loans growth wasbelow our and management expectations of 5% and3%, respectively.

 Headline cost-to-income ratio (CIR) came in at 45%(-2ppts). However, if we were to strip off the onetimedivestment gain in 1Q15, the ratio would havejumped to 51% (+4ppts).

 Asset quality was intact despite credit charge ratioticking up by 3bpts. Also, loan loss coverage (LLC)is still above the 100% mark.

 Annualised core ROE declined 3ppts to 10%;otherwise it would have been flat at 14% if we wereto include the one-time divestment gain.

 Regulatory capital ratios were enhanced by 60bpts-80bpts across the board.

3Q15 vs. 2Q15, QoQ Quarterly core profit was down 7%, no thanks to: (i)a contraction in net interest income (-5%), (ii) lowerIslamic banking growth (-7%), and (iii) weaker noninterestincome (-19%).

 NIM narrowed 12bpts on the back of spiralling costof funds as competition in the deposit taking spaceheated up.

 Thanks to a commendable 5% increase in deposits,LDR had fallen by 4ppts. To note, loans growth wastepid at +1%.

 CIR increased by 5ppts as total income base shrunkby 10%.

 Asset quality deteriorated slightly as gross impairedloans ratio rose 9bpts. The rise in impaired loans(+7%) was primarily due to a single accountexposure, which caused delinquency rate in the realestate sector to increase to 5% (from 1%).

Outlook  Loans growth is expected to remain weak given: (i) tight consumer/business spending and (ii) its already high LDRof 97% limiting lending capacity. Management reiterated its FY15 loans growth expectation of +3% (9M15: +1%,Kenanga Research: +2%).

 Higher cost of borrowing along with rising inflationary environment may exert pressure on asset quality asdelinquency rates are likely to climb. Management maintained its: (i) FY15 loan loss charge expectation of lessthan 15bpts (9M15: 4bpts, Kenanga Research: 20bpts) and (ii) FY15-FY17 gross impaired loans ratio to be below1.9% (9M15: 1.9%, Kenanga Research: 1.9%).

 Stiff price-based competition for loans and deposits in the market to further compress NIM. Management kept itsFY15 NIM guidance where it is expected to shrink by 15bpts (9M15: -16bpts, Kenanga Research: -34bpts).

 Management retained its view that 38% of FY15 total income should be derived from non-interest income. Thissegment is expected to be fuelled by the strategic alliance with MetLife Inc to grow its general insurance business(9M15: 33%, Kenanga Research: 36%).

 All in, AMBANK reiterated its FY15 and FY16-FY17 net profit growth targets of +8% and +6%-10%, respectively –this takes into consideration the one-time RM208m divestment gain of AmLife & AmFamily Takaful in 1Q15. If wewere to strip that away, its FY15 core profit is expected to contract by 4% (9M15: -10%, Kenanga Research: -8%).

 FY15-FY17 ROE targets were unchanged at 14% (9M15: 10%, Kenanga Research: 11%-12%).

 Dividend payout ratio of 40%-50% for FY15-FY17 was maintained (Kenanga Research: 41%).

Change to Forecasts Given the lacklustre 9M15 results along with a subdued outlook ahead, we toned down our FY15E/FY16E coreprofit slightly by 2% to RM1,646m/RM1,688m from RM1,678m/RM1,715m. Essentially, we lowered ourFY15/FY16 assumptions of: (i) NIM by 16bpts -18bpts, (ii) loans/deposits growth by 2.5ppts-3.0ppts, and (iii)Islamic banking income by 2%-6%.

 In turn, FY15/FY16 ROE is estimated to be 11%-12%, similar to our previous projections. For dividend, we forecast AMMB to declare DPS of 22.0–23.0sen, comparable to before given our slightdownward revision in core earnings.

Rating Maintain MARKET PERFORM

Valuation  In tandem with the cut in earnings, our TP is lowered to RM6.62 from RM6.75 based on 1.34x CY15 P/B(previously 1.37x CY15 P/B).

 The P/B multiple is derived using the Gordon Growth Model (GGM), where we utilised: (i) COE of 9.2%, (ii) CY15ROE of 11.7% (previously: 11.9%), and (iii) terminal growth rate (TG) of 2%.

 The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward.

 Recall that the stock traded at average P/B of 1.53x for the past two years when it generated ROE of ~14%. As aresult, we now have a lower P/B valuation yardstick.

Risks to OurCall Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

 Slower-than-expected loans growth.

 Worse-than-expected deterioration in asset quality.

Source: Kenanga