AMBANK’s 1Q18 performance was within expectations despite a softer bottomline. No dividend declared for the quarter as expected. TP is raised to RM5.00 after applying a higher PB due to traction in loans. Our call is revised upwards to OUTPERFORM due to undemanding valuations.

Within expectations despite softer bottom line. AMBANK’s 1Q18 core net profit of RM328.3m (+1.6% YoY) is in line with our/consensus expectations, accounting for 22%/23% of estimates. Broadly the softer growth was underpinned by a better topline revenue of (+4.1% YoY) as opex rose slightly by +3.3% YoY with credit recovery falling by 70% to RM10.7m. Topline improved due to strong growth from Net Interest Income (NII) and Islamic Banking at +6.1% and +14.3%, respectively. Positive growth in NII was supported by stronger loans (+6.6%) and improvement in annualised NIM by 16bps to 2.1% (vs our expectation of a 7bps expansion). Cost to Income ratio marginally improved by 50bps to 51.1% (vs industry at 49.1%) as topline outpaced opex by 80bps (+4.1% vs +3.3%).

Loans better than expected. For the quarter, loans growth was at +6.6% YoY (vs our expectations of ~4.5%). Deposits growth was faster from the year before at +7.2% YoY forcing its loan-to-deposit ratio to dip by 50bps to 99.8%. Overall liquidity is healthy with Loan-to-Fund ratio up by 75bps to 83.2% and Loan-to-Coverage ratio (LCR) above 100% (as guided by management). Despite CASA falling by 270bps to 21.8%, NIM was healthier due to repricing of assets and lower cost of funds. Asset quality deteriorated by 19bps to 1.9% (vs industry at 1.6%) with credit recovery lower by 12bps to -0.05% (or net RM20m vs RM64m in 1Q17.

QoQ, slight hiccup in momentum. After a strong 4Q17, this quarter saw a fall of 2.2% on the back of falling topline (-2.1%) and falling associate contribution by 56% to RM5.8m. Fall in topline was dragged by fall in Non-Interest Income (NOII) at 11.5% despite NII and Islamic Banking income improved at +3.0% and +5.4%, respectively. NII improved as NIM (up by 6bps to 2.1%) and loans improved (+1.9%). Both LDR and LTF saw slight uptick by 300bps and 75bps, respectively, for the quarter. Slight deterioration in asset quality from the preceding quarter with GIL up by 2bps to 1.9% with credit recovery falling by 10bps to -0.05%.

Loans momentum seems to be gaining traction. We are encouraged by commendable performance in loans YoY and QoQ (from SME’s and residential properties). We believe its Top 4 aspirations is on track with strong performance from the SME segment growing at double digit for the 3rd straight quarter. We expect healthy NIM going forward as we feel management is comfortable with its adjusted LDR (includes termfunding and debt capital of RM12.0b) profile of ~ 86%, as such competition for deposits is unlikely with AMBANK likely to tap into the bond and interbank market if the need arises.

No change in earnings. As results were in line, forecast earnings are maintained at RM1,502m for FY18.

Target Price raised and call revised upwards. We raised our TP to RM5.00 (from RM4.91) based on a 0.95x P/B (previously 0.9x P/B) where we utilised; (i) COE of 9.5% (ii) FY18 ROE of 9.2%, and (iii) terminal growth rate of 2.5% (unchanged). 0.95x P/B implies -0.9SD (previously at -1.0SD) and we feel a slightly lower SD is justified giving its progress in loans traction and healthier NIMs, although we are mindfull of external factors ahead from moderating economy, which will lead to deterioration in asset quality. As valuations are undemanding due to the sharp fall in its share price, we upgrade it to OUTPERFORM.

Source: Kenanga Research - 25 Aug 2017