Post-meeting with management last Friday, we still find that the stock lacks re-rating catalysts. Hence, we keep our MARKET PERFORM rating on AMBANK with an unchanged TP of RM6.62. Key takeaways from the meeting were: (i) its steep NIM compression might persist into FY16, (ii) recovery in bad loans can last for another year, and (iii) the temporary hiccup in asset quality is not a concern.

No respite for NIM compression. Management reiterated that the steeper-than-expected fall in net interest margin (NIM) came on the back of: (i) loans portfolio realignment to mortgage and wholesale segments as well as (ii) increased market intensity for deposits especially in the retail space; NIM fell by about 25bpts YoY. Heading into FY16, this trend is expected to continue as AMBANK is looking to uphold its current strategy to de-risk its balance sheet. Also, cost pressure remains elevated.

Provision for NPL may rise, slight hiccup in asset quality is not a concern. For the past few years, provision for bad loans pointed south primarily due to strong recoveries. According to management, this can last for another year. As of 9M15, credit charge ratio stood at 0.04% vs. 0.08% in FY14. Hence, we reckon it is more susceptible to an up-cycle given that its current credit cost is ultra-low. A more normalized figure for credit charge ratio is 0.20-0.30%, in line with our FY15-FY16 assumption. Regarding the rise in 3Q15 impaired loans (+7% QoQ), we understand that restructuring talks is underway with the real estate client in order to foster recovery and management does not view this as a cause for concern.

Higher NII and lower overheads to lift earnings. Other focus areas include growing its: (i) fund management, (ii) insurance and (iii) transactional banking businesses to boost its non-interest income (NII) contribution. Recall, AMBANK expects 38% of its FY15 total income to be derived from NII. Also, stringent cost discipline will continue to be applied moving forward in order to lift its bottom-line growth; management hopes to bring down its cost-to-income ratio by more than 1ppts (to below 44%) in the next two years.

Capital management outlook. AMBANK’s fully loaded CET1 ratio is ~9-10%. To further improve on this, management will continue to optimize the group’s capital structure and efficiency by: (i) disposing its non-core operations, (ii) streamlining internal organization structure, and (iii) building advanced internal rating based capabilities. Given that its current CET1 ratio is not overly above the Basel III requirement of 7% (by 2019), we rule out the possibility of any special dividend or an increase in dividend payout (~40-50%) over the short-term.

Forecasts & risks. No change to our forecasts. The key risks are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, and (iii) worse-than-expected deterioration in asset quality.

Valuation & recommendation. All in all, we keep our MARKET PERFORM rating on AMBANK. At this juncture, the stock lacks rerating catalysts as we opine that its ROE target of 14% for FY15- FY17 is a tall order to achieve; AMBANK’s annualised core ROE was only 10% as at 9M15. Hence, our TP of RM6.62 based on 1.34x CY15 P/B is kept. The P/B multiple is derived using the Gordon Growth Model (GGM), where we utilised: (i) COE of 9.2%, (ii) CY15 ROE of 11.7% and (iii) terminal growth rate (TG) of 2%. 

Source: Kenanga