AMBANK’s 1H18 performance is below/inline our/market full-year estimates, making up 43%/48%. A 5.0 sen DPS was declared (in line). Slight changes to FY17E/FY18E earnings. TP reduced to RM4.75 but maintained OUTPERFORM due to undemanding valuations.

Below our expectation. 1H18 CNP of RM659.7m is below our expectation accounting for 43% of full-year estimate but in line with consensus at 48%. The underperformance from our estimate was due to: (i) lower-than-expected credit recovery, and (ii) higher CIR at 57%.

Results Highlights. 6M18 CNP of RM659.7m fell by 2% YoY underpinned by (i) topline growth of +4%, (ii) lower credit recovery by 28% despite a lower tax rate by 4ppts to 18%. Topline rebounded supported by fund-based income (+9%) and Islamic banking income (+13%) growth, offset by fall in fee-based income (-6%). Nevertheless fund-based income was supported by higher loans 7% (vs our expectations of <5%) coupled with better NIM by 9bps (in line). CIR deteriorate marginally by 80bps to 57% (vs industry at 48.0%) as opex outpaced topline (+5% vs +4%). Credit recovery was lower by 7bps to 0.10% (vs our expectations of 0.18bps). QoQ, 3QFY17, CNP growth of 1% was due to better net credit recovery of RM28m vs RM11m in 1QFY18 as topline fall by 1%. Topline fell dragged by fall in fee-based income (-2.0%) with fund-based income and Islamic banking income marginally flattish. Fund-based income was flat as loans were marginally flattish coupled with falling NIM (by 11bps.

Outlook. We are encouraged by commendable performance in loans YoY (from SME’s and residential properties) although its flattish QoQ. We believe this is a temporary blip and will continue its momentum in the following quarters. Loans growth will be supported by growth from the midcrop segment. We believe its Top 4 aspirations are on track with strong performance from the SME segment growing at double digit for the 4th straight quarter. We expect healthy NIM going forward due to better deposits mix ahead and (ii) we feel management is comfortable with its adjusted LDR (includes term-funding and debt capital of RM12.0b) profile of ~ 84%, as such competition for deposits is unlikely with AMBANK likely to tap into the bond and interbank market if the need arises.

Earnings revised. Post results we tweak slightly our credit recovery resulting in FY18E revised downwards by 8% to RM1,412m. For FY19E we revised downwards by 20% on account of higher CIR and credit losses.

Maintained OUTPERFORM with a lower TP. While issues on asset quality are receding, other challenging headwinds such as moderate loans growth and pressure on credit costs still prevail. Our GGM-TP is now at RM4.75 as we rollover our valuations to FY19 based on a P/BV of 0.85x (previously 0.95x) where we utilised: (i) COE of 9.2% (9.5% previously), (ii) FY19 ROE of 8.2% (from 8.4%), and (iii) terminal growth of 2.5% (unchanged). At 0.85x P/BV implying a 1.3SD below mean on the impact of MFRS9 in FY19. While share price has retraced due to weak market sentiment, we bank on better performance ahead via its Top 4 Aspirations target coupled with a dividend yield of 4.8%, above industry average.

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 - 29 Nov 2017