AMBANK’s 1Q17 core earnings of RM323m were within expectations accounting for 23%/25% of our/consensus estimates brought about by higher-than-expected loans growth and better-than-expected credit recovery. No dividends were proposed for the quarter as expected. No change in our earnings forecast; thus, our TP and MARKET PERFORM call is maintained.

1Q17 core net profit (CNP) fell 5%, brought about by falling top line growth of 1.8% and higher opex of 9.9% despite improvement in loans growth and a credit recovery of 17bps. On a QoQ basis, despite falling loans, CNP improved by 15.3% with NIM improving by 7bps and a credit recovery of 17bps.

1Q17 vs 1Q16, YoY

• Total income fell by 1.8% dragged by fall in: (i) Net Interest Income (NII) at 7.4% (1Q16: -16.2%), and (ii) Islamic Banking income at 4.7% (1Q16: -0.5%) but mitigated by rebound in Net Interest Income (NOII) by 7.2% (1Q16: -55.7%).
• NIM compressed by 18bps (vs. our estimate of 4bps compression) attributed to downward pressure of average lending yields.
• Cost to Income Ratio (CIR) remained intense, rising by 6ppts to 56.6% (vs. industry average of 49.7%) as opex growth (+9.9%) outpaced total income growth. The higher opex were attributed to higher wage costs & investment and higher regulatory and compliance related expenses.
• Loans growth improved 1.6% whilst deposits declined by 3.5% (vs. the industry’s +5.6%/-0.5% and our expectations of 1.0%/2.6%). LDR rose 5ppts to 100.3% (above the industry average of 87.5%) as loans outpaced growth. Loans were driven by property financing (+18.1%) but offset by falling corporate loans of 1.9%. Loans to SME improved by 3.8%. The fall in deposits was led by falling demand for term deposits by 7.6% but CASA improved by 13.2% making CASA composition to total deposits up by 4ppts to 24.5%.
• Asset quality improved as Gross Impaired Loans (GIL) fell 21bps to 1.69% (vs. industry 1.66%). Loan loss coverage was down by 22ppts to 81.2% (vs the industry’s coverage of 89.5%). Due to better recoveries, there was a credit recovery 17 bps (vs. our expectations of credit recovery of 13bps).
• CET1 and CAR improved by 48bps and 2bps to 11.2% and 16.1% (after deducting proposed dividends) well above the regulatory requirements of 7% and 10.5%), respectively. ROE was at 8.1% (below our forecast of 9.2%).

1Q17 vs. 4Q16, QoQ

• For the quarter, CNP improved by 15.3% (4Q16: -6.7%) brought about by improved top line growth of +5.1% and lower opex (- 13.7%).
• NIM improved by 7bps to 1.9% brought about by lower cost of funds and asset repricing via wholesale banking.
• CIR fell by 12ppts to 56.6% as opex fell 13.7% vs top line improvement of 5.1%.
• Loans fell by 1.0% (4Q16: +1.2%) vs deposits decline of 4% (4Q16: -0.6%). This led to LDR surging by 3ppts to 100.3%. However, CASA improved by 4ppts to 24.5%.
• Asset quality improved 15bps as GIL fell to 1.7%. LLC was stable at 81.1%. Write-back was slower for the quarter with credit recovery at 17bps vs. 18bps in 4Q16.

Further NIM compression is likely, going forward. No change in management’s guidance for FY17/FY18; (i) ROE of 9.5% to 10.0%, (ii) PATMI ~ 10%, (iii) CIR of between 50% to 55%, and (iv) 40% dividend pay-out. Our assumptions are left unchanged for FY17/FY18 as follow; (i) loans growth of 1.0%/1.8%, (ii) deposits growth of 2.5%/2.4% for FY18, (iii) NIMs at 1.89% for FY17 and 1.86% for FY18, (iv) CIR of 53%/50%, (v) credit recovery of 0.13%/credit charge of 0.09%, and (vi) ROE of 9.2%/8.2% for FY18. We are still concerned on its ability to grow its loans, thus we believe further compression on NIM is likely with average lending yields facing downward pressure and higher cost of funds (to attract depositors). As for asset quality, management is confident of stability going forwards as its internal risk assessment showed 79% to 89% (strong to satisfactory) quality in both the real estate and O&G sectors. Incidentally, its exposure to the O&G sector is around 4%.

No change to earnings forecast. As results were within expectations with no revision of our assumptions, our FY17E/FY18E earnings are maintained at RM1,437m/RM1,360m.

Maintained Target Price and call. Our TP of RM4.63 is maintained based on a 0.88x P/B where we utilised; (i) COE of 10.1% (ii) FY17 ROE of 9.2 (previously FY17 ROE of 9.6%), and (iii) terminal growth rate of 2.5% (unchanged). The lower P/B is to reflect lower ROE generation going forward. Maintained MARKET PERFORM.

Risks to our call are: (i) lower than expected margin squeeze, (ii) higher-than-expected loans & deposits growth (iii) worse-than-expected deterioration in asset quality, and (iv) Higher-than-expected rise in credit charge.

Source: Kenanga Research - 23 Aug 2016