Period

4Q15/FY15

Actual vs. Expectations

Excluding a one-time divestment gain (RM371m) and one-off restructuring cost (-RM70m), AMBANK’s FY15 core profit of RM1,618m (-9% YoY) came in line with our expectation but missed consensus, representing 98% and 93% of respective forecasts.

Dividends

A final DPS of 15.3 sen was declared (vs. 4Q14: 16.9 sen), bringing its full year DPS to 27.3 sen (vs. FY14: 24.1 sen). As for pay-out ratio, it increased to 43% from 41%. Notably, the final DPS surpassed our and street consensus expectations by 4.9 sen and 3.3 sen, respectively.

Key Results Highlights

FY15 vs. FY14, YoY

The decline in core profit (-9%) was mainly due to: (i) lower interest income (-8%), and (ii) weak contribution from its Islamic banking unit (-8%). However, the impact was cushioned by bad loans written back (RM31m vs. FY14: -RM68m).

The shrinkage in interest income was caused by a shift in loans portfolio mix from auto-financing (-11%) to mortgage (+6%) and wholesale segments (+2%).

Net interest margin (NIM) compressed 23bpts, no thanks to stiff price-based competition in the market and from loans portfolio rebalancing.

Loans growth declined 2% (as a result of lumpy repayment) while deposits ticked up 3%. In turn, loanto- deposit ratio (LDR) fell 4ppts. To note, AMBANK’s loans growth was below both our and management’s expectations of 2-3%.

Current account & savings account (CASA) growth was flat and it makes up 20% of total deposit base.

Headline cost-to-income ratio (CIR) came in at 46% (unchanged). However, if we were to strip away the one-time divestment gain and one-off restructuring cost, the ratio would have jumped to 49% (+3ppts).

Asset quality improved as: (i) gross impaired loans ratio (GIL) fell 7bpts, and (ii) credit charge ratio nudged down 11bpts. Furthermore, loan loss coverage (LLC) was still above the 100% mark.

Core ROE fell 3ppts to 10%, otherwise it would have been flat at 13% if we include the one-time divestment gain and one-off restructuring cost.

Regulatory capital ratios enhanced 40bpts-90bpts across the board.

4Q15 vs. 3Q15, QoQ

Core profit ticked up 2% on the back of: (i) stronger contribution from its Islamic banking business (+9%), and (ii) its non-interest income widened (+16%; excludes one-time divestment gain).

NIM narrowed 3bpts due to rising cost of funds as competition in the deposit taking space heated up.

With a 2% increase in deposits, LDR had fallen by 2ppt while loans growth was flat.

Headline CIR fell 2ppts (to 47%) but if we were to adjust for one-off items, it would have increased by 1ppts (to 50%).

Asset quality gained traction as: (i) GIL dropped 9bpts while (ii) LLC stayed above 100%.

Outlook

Weak loans growth to persist on the back of: (i) tight consumer/business spending, and (ii) its already high LDR of 95%, will limit lending capacity. Management expects its FY16 loans growth to come in at 4-5% (Kenanga: +3%, FY15: -2%).

Higher cost of borrowing may exert pressure on asset quality causing delinquency rates to climb. Furthermore, we believe that there will be lesser recoveries in FY16 as most of the bad legacy business loans were already restructured or recovered last year. Management guides for: (i) FY16 loans loss charge of 20bpts (Kenanga: 22bpts, FY15: -3bpts), and (ii) FY16E gross impaired loans to be below 2.0% (Kenanga: 1.9%, FY15: 1.8%).

Stiff price-based competition for loans and deposits in the market to further compress NIM. Management expects its FY16 NIM to contract 15-20bpts (Kenanga: -5bpts, FY15: -31bpts).

Management expects that ~40% of FY16 total income to be derived from non-interest income. This segment is expected to be fuelled by the strategic alliance with MetLife Inc to grow its general insurance business (Kenanga: 36%, FY15: 33%).

Overall, AMBANK expects its: (i) FY16 core profit to grow by 3-5% (Kenanga: +2%, FY15: -9%) and (ii) FY16 ROE to come in between 12-12.5% (Kenanga: 11%, FY15: 12%). To note, management targeted ROE to register at 14% for FY15-FY17earlier.

Dividend pay-out ratio of 40%-50% for FY16 was maintained (Kenanga: 43%, FY15: 43%).

Change to Forecasts

Post updating the full set of FY15 financial results into our model, we made some housekeeping adjustments. Our FY16 core profit was revised down by 2% to RM1,653m from RM1,688m. Furthermore, we have also introduced our FY17 forecasts, where we expect earnings to grow 2% to RM1,688m.

FY16/FY17 ROE is estimated to be at 11% (previously 12%).

For dividend, we forecast AMBANK to declare DPS of 24.0 sen for FY16/FY17 (previously 23.0 sen), after nudging up our payout assumption to 43% from 41%.

Rating

Maintain MARKET PERFORM

We are still bothered by its: (i) high LDR of 95% and (ii) increasing competitive pressure on its general insurance business, come 2016, when the industry turns to a de-tariff market. Moreover, we opine that its FY16 ROE target of 12- 12.5% is difficult to achieve. That said, we opine that the above-mentioned negatives are largely priced-in at current price. To note, AMBANK possibly being an M&A target could also provide some support to share price.

Valuation

In tandem with the cut in earnings and rolling over our valuation to CY16, our TP is lowered to RM6.48 (from RM6.62). This is based on 1.21x CY16 P/B (previously 1.34x CY15 P/B); we utilised: (i) COE of 9.2% (unchanged), (ii) CY16 ROE of 10.7% (previously: 11.7%), and (iii) terminal growth rate of 2% (unchanged).

The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward. Recall that the stock was traded at average P/B of 1.53x for the past two years when it generated ROE of ~14%. As a result, we now have a lower P/B valuation yardstick.

Risks to Our Call

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

Slower-than-expected loans and deposits growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Source: Kenanga Research - 25 May 2015