Despite the 3% YoY decline in earnings, we are slightly positive on the Group due its loans gaining momentum and efficiency in NIMs management. We raised our TP to RM4.73 but maintain MARKET PERFORM, mindful of the risks ahead.

Higher credit recovery mitigated fall. 9M17 core net profit (CNP) of RM988.8m fell 3.3%, brought about by declining top-line but mitigated by strong credit recovery. Top-line fell by 2.5% YoY as Fund based income fell by 6.1% but mitigated by improving fee-based income at 4.7%. Growth in fee-based income was driven by its insurance business (+11% YoY) and fee & commission income (+8%). NIMs fell by 6bps due to higher funding costs. Cost to Income ratio (CIR) was 230bps higher as opex surged slightly by +1.5% YoY (vs. revenue decline of 2.5%) vs. industry average of 48.9%.

Loans rebounded in 9M17 at +4.4% YoY brought about by a surge in Q3 (vs. industry’s +5.3% YoY and our expectation of +1.8% YoY). Loans were driven by mortgage (15% YoY) and SME (+11% YoY). Deposits fell 4.6% YoY (vs. industry’s +1.5% YoY and our estimate of +2.5%). We understand that the fall in deposits was a conscious effort by management to contain NIMs compression. Despite the fall, CASA grew marginally at 0.8% YoY, pushing CASA ratio higher by 120bps to 21.6%. As loans outpaced deposits, loan-to-deposit ratio (LDR) rose by 9ppts to 104.6%. On a positive side, there was a credit recovery of 23bps (vs. our estimates of 13bps) with recoveries mostly in Q3. Asset quality improved by 26bps to 1.54% with the improvement across the board (vs. industry’s 1.64%). Capital remains adequate with CET1 and CAR at 11.3% and 15.8% well above the regulatory requirements of 7.0% and 10.5%, respectively.

Loans momentum seems to be gaining traction as AMBANK’s Top 4 aspirations seem bearing fruit with strong SME growth translating into higher loans and enhancing NIMs in Q3. The catalyst stems from new strategic tie-ups and new product aspirations. Mortgages improved via the focus on secondary market. As for asset quality, management is confident of stability going forwards as its internal risk assessment showed 51% to 76% (strong to satisfactory) quality in real estate/O&G sectors. Incidentally, its exposure to the O&G sector has been reduced by RM600m to under 3% of total portfolio. Management’s conscious effort in managing deposits contributed to its improvement in NIMs QoQ. We view that NIMs will be improved going forward as management is comfortable with its adjusted LDR (includes term-funding and debt capital of RM12.2b) profile of ~ 90% as such competition for deposits is unlikely.

Earnings revised. We revised our assumptions in light of new developments, our FY17E/FY18E earnings are at RM1370m/RM1,557m (revision of -5%/+12%).

Target Price raised and call maintained. We raised our TP to RM4.73 (from RM4.63) as we roll over our valuation to FY18 based on 0.90x P/B where we utilised; (i) COE of 10.2% (ii) FY18 ROE of 9.4%, and (iii) terminal growth rate of 2.5% (unchanged). Previously, it was 0.88x P/B where we utilised; (i) COE of 10.11% (ii) FY17 ROE of 9.2 and (iii) terminal growth rate of 2.5%. Despite the gain in momentum, we are still cautious on the risks ahead; thus, maintain

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

Source: Kenanga Research - 27 Feb 2017