Yesterday, AMBANK held a conference call with analysts to address the recent news reports concerning the company. All in, we believe that the market had overreacted and its share price was undeservingly punished. In turn, we are seeing a V-shape recovery. However, further upside potential may be capped by a subdued outlook. Hence, we are in the midst of reviewing our rating recommendation, pending its results release next month (previously MARKET PERFORM). For now, we retain our GGM-TP at RM6.48.

 

Worst performing banking stock YTD (-11%). Among the banks under our coverage, AMBANK has the worst YTD share price return (-11%) due to: (i) a subdued outlook, (ii) market-wide weakness coupled with (iii) allegation that funds (~USD700m) from 1Malaysia Development Bhd (1MDB) were channelled into the Ambank Islamic bank account of Prime Minister Datuk Seri Najib Razak.

 

Clarification from management. Given the seriousness of such assertion, management held a conference call with analysts to clarify the issue. In short, they eluded the allegation and claimed that it abided by the rules and regulations set forth by Bank Negara Malaysia (BNM) – s.133 of the Financial Services Act 2013 in relation to client confidentially. Management further added that AMBANK has sound corporate governance in place. That said, they will co-operate and aid in the investigation of the matter in an open and transparent manner.

 

Business as usual at AMBANK. In terms of operational aspects, management shared that it is business as usual (BAU) at AMBANK. Loan and deposit-taking activities were normal and did not experience any significant dip unlike its share price performance over the past one month. We gathered that its 1Q16 financial results will be released sometime in the third week of August. 

Outlook and concerns. Nevertheless, we are still vigilant over its: (i) high LDR of over 95% and (ii) rising competition in the general insurance industry once it turns to a de-tariff market come 2016. In addition, management had recently revised down its FY15-17 ROE targets to 12-12.5% from 14%.  

Forecasts & risks. No change to our forecasts. The key risks are: (i) steeper margin squeeze from stronger-than-expected competition, (ii) slower-than-expected loans and deposits growth, along with (iii) higher-than-expected rise in credit charge.

 

Valuation & recommendation. All in, we believe that the market had overreacted to the negative newsflow and the stock was undeservingly punished. Over the past few days, its share price saw a V-shape recovery. That said, this may be capped by the concerns mentioned above. At this juncture, we retain our GGM-TP at RM6.48. This is based on 1.21x CY16 P/B (COE of 9.2%, CY16 ROE of 10.7% and TG of 2%). As for rating recommendation, we are in the midst of reviewing it, pending its results release next month (previously, we have a MARKET PERFORM call).