We are positive on AMBANK’s recent MSS program and expect cost earnings savings of RM60m. Coupled with positive loan momentum, we raised our TP to RM4.90 and reiterate our OUTPERFORM call.

Undertaking MSS. AMBANK announced on Monday a Mutual Separation Scheme (MSS) for eligible staff with the exception of senior management and sales personnel. The MSS is voluntary with a take it or leave it basis. At yesterday’s meeting with management, AMBANK expects around 1,500 to 2,000 staff (14-18% of the total workforce) to take up the offer. We are positive on the offer with a conservative estimation cost of between RM70 and RM140m which is expected to be reflected in 4Q18. Cost savings are expected to be around RM60-70m moving forward. Explaining further, management stated that the VSS is inevitable, as the group embarks on its T4 aspirations since last year. With operational efficiency in mind coupled with the impact of digitization, it has become necessary to shave off staff without the necessary skill-sets with the added objective of allowing opportunity for those who wants to ply their trade somewhere else.

Capital Sufficient for MFRS9. Management is satisfied with its loan loss coverage (LLC) presently. As of 1H18, its LLC is at 101.4% (including Regulatory Reserve). Depending on economic conditions, higher provisioning will be added if needed. At 11.5%, CET1 capital is adequate the cover the impact of MFRS9 on Day 1 (1 April 2018). As MFRS9 approaches, management sees credit loss in 2H18 implying a lower credit recovery than initially expected as 1H18 saw a credit recovery of RM50m.

Loan momentum to be maintained albeit slower. For 2H18E, we understand that loans growth will be around 5-6% YoY (1H18: 6.6% YoY) driven by Business Banking (2H18E: 13-14% YoY) and Commercial Banking (2H18E: 6-7% YoY) comprising 8% of the loan portfolio and mortgages at ~9% YoY (30% of portfolio). Auto Finance is expected to remain flat due to the focus on more non-national vehicles (constituting 65% of the portfolio from 50% previously) with corporate loans expected to be flat for strategic reasons. The focus on the Business and Commercial Banking space is expected to continue to alleviate its NIMs at around 2% (1H18: ~2%).

Earnings revised. Post briefing, we tweaked slightly earnings by - 6%/3% for FY18/FY19 to RM1.33b/RM1.45b respectively. We assumed the one-off MSS will cost RM70m with cost savings of RM60m moving forward. The rest of our FY18 assumptions are; (i) loans growth <5% (unchanged), (ii) NIMs at 1.94% (unchanged), (iii) CIR of at >56% (<54% previously), (iv) credit recovery of 4bps (9bps previously), and (vi) ROE of 8.1% (8.4% previously). For FY19E; (i) loans growth <5% (unchanged), (ii) NIMs improved by 4bps (unchanged) (iii) CIR of at <54% (<55% previously), (iv) credit costs of 7bps (unchanged), and (vi) ROE of 8.4% (8.0% previously).

TP raised and call maintained. Our TP is raised to RM4.90 (from RM4.75) based on a blended FY19E PB/PE ratio of 0.8x/9.4x. The PB at (-0.8SD below mean) is to reflect challenging ROE ahead (impacted by MFRS9) and PER (-0.6SD average mean) to reflect our cautious optimism for loans ahead. With loans dynamic momentum coupled with elevated NIM, we maintain OUTPERFORM.

Source: Kenanga Research - 10 Jan 2018