Period

1Q16

Actual vs. Expectations

Excluding a one-time divestment gain in 1Q15, AMBANK’s 1Q16 core net profit (CNP) performed slightly better at +3.2% YoY (1Q15: -28.8%). However, it missed our and consensus estimates, representing 20.5% and 20.9% of the respective forecasts.

Dividends

No dividends declared as expected. Historically, the Group does not declare dividends in the 1Q.

Key Results Highlights

FY15 vs. FY14, YoY

The modest growth of 3.2% in CNP was mainly due to net write back (RM18m) vs. 1Q15 allowance of impairment losses RM-112.3). Overall, the modest growth was dragged by: (i) decline in net interest income (NII) by 15.8% (FY15:- 6.9%), and (ii) decline in non-interest income (NOII) at 55.7% (1QFY15: +97.2%).

The shrinkage in NII was due to net interest margin (NIM) compression by 90bps from the previous year.

Excluding a one-off divestment gain, NOII decreased by 8.7% YoY, impacted by lower fees from lending, securities and investment banking activities and drop in contributions from the insurance business.

Net loans contracted by 1.8% YoY (vs +1.7% YoY for 1Q15) to RM84.1b due to the Group’s portfolio rebalancing activities and lumpy corporate repayments. This is lower as compared to our estimate of 2.4% YoY.

Current account & savings account deposits (CASA) growth declined by 0.3% vs 1Q15 growth of +4.5%. Total deposits growth outpaced CASA at 3.3% (1QFY15: -0.4%). This in turn reduced CASA-to-Total Deposit ratio to 20.9% vs 21.4% in 1Q15.

Cost-to-income ratio (CIR) performed miserably jumping to 50.6% vs 42.7% in 1QFY15, as compared to our estimate of 46.6%. Total income declined at faster pace (-34.1% YoY) than overhead expenses (-21.9% YoY), leading to higher CIR.

Asset quality improved as: (i) gross impaired loans ratio (GIL) fell 7bpts, and (ii) the annualised credit charge ratio was registered at 1bpts vs 29bpts in 1Q15. Previously we estimated credit charge at 22pbts. Furthermore, loan loss coverage (LLC) was still above the 100%-mark at 103.2% (1Q15: 120.5%).

Annualised core ROE fell by 45bps to 8.9% (vs. annualised 1Q15 ROE of 9.35%).

Regulatory capital ratios enhanced 20bpts-75bpts across the board.

4Q15 vs. 3Q15, QoQ

Core profit declined by 20.3% dragged by: (i) net interest income; (ii) Islamic banking business, and (iii) non-interest income. All three declined by 10.1%, 7.9% and 22.0%, respectively. The drop in net profit was also helped by allowances for loans loss at RM10.7m as compared to a RM59.4m writeback in the previous quarter.

NIM plunged by 90bpts while Islamic banking rate dropped by 6bps.

Headline CIR swelled higher by 3.2ppts

LDR still holds at 95.3% as CASA improved by 60bps.

Asset quality is still stable as: (i) loans provisions fell by 2bps, (ii) GIL inched up only by 1bpts, and (iii) LLC stayed above 100%.

Outlook

Weak loans growth likely to persist on the back of: (i) slower GDP expansion, (ii) tight consumer/business spending, and (iii) LDR of 95%, will limit lending capacity. We thus lower our loan growth assumptions by 50bpts from +3.0% previously for FY16 (FY15: -2%).

Stiff price-based competition for loans and deposits in the market to further compress NIMs. We have assumed it to be at 1.83% for FY16 and 1.93% for FY17. Management guided that NIMs will improve by 2bpts every quarter onwards.

We revised CIR upwards to 50.0% for FY16 and 45.5% for FY17. Previously it was 46.6% for both FY16 and FY17.

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. As the Group rebalance its portfolio and reduce exposure to less preferred segments coupled with evidence of good asset quality, we revised our credit charge downwards to 15bpts (from 22bpts previously). Management maintained its guidance for FY16E GIL ratio to be below +2.0%. We maintained at +1.9% for both FY16 and FY17.

Overall, AMBANK expects FY16E ROE to come in between 12%-12.5%. Nonetheless, we believe this could be an uphill task. In fact, we have revised it to 9.2% for FY16 and 10.3% for FY17 (previously it was 11.1% and 10.6% respectively).

Change to Forecasts

We have revised our forecasts lower. Net profit estimate for FY16 adjusted down to RM1,371.3m (-17.1%) while profitability for FY17 was lowered to RM1,613.8m (-4.4%).

The ROE is now assumed at 9.3% and 10.3% for FY16 and FY17, respectively. Previously it was at 11.1% and 10.6%.

No changes in our dividend forecasts.

Rating

Maintain MARKET PERFORM

Valuation

In tandem with the cut in earnings, our TP is lowered to RM5.88 (from RM6.48). This is based on 1.11x CY16 P/B (previously 1.21x CY15 P/B); we utilised: (i) COE of 9.2% (unchanged), (ii) CY16 ROE of 10.3% (previously: 10.7%), 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 1.5x 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 - 20 Aug 2015