AMBANK’s 9M18 performance is below our/market full-year estimates, making up 66% for both. No dividend declared as expected. FY18E earnings reduced, but FY19E earnings maintained. TP maintained at RM4.90 with OUTPERFORM call due to undemanding valuations.

Below expectations. 9M18 CNP of RM879m is below ours/consensus expectations accounting for 66% of both full-year estimates due to higher opex and normalisation of credit costs. No dividend declared as expected.

Credit costs normalise. YoY, 9M18 CNP of RM879m fell 11% hit by impairment allowances of RM28m (credit costs of 4bps vs. 9M17 credit recovery of 23bps). Top-line rebounded to +7% driven by Islamic banking (+17%) and fund-based income (+7%) offset by soft fee-based income. Loans continued to be commendable at +4% (vs. our expectation/system <5%/4%. Supporting fund-based income was stable NIM at ~2%. CIR remained stable at 58% due to higher opex (vs. expectation/guidance/industry at <55%/<56%/48%. Asset quality deteriorated by 30bps to 1.8% (vs. the system 1.5%). QoQ, CNP fell 34% on account of contracting top-line (-3%) and exacerbated by impairment allowances (vs. writeback in the preceding quarter). The contracting top-line was mitigated by higher Islamic banking income (+6%) as both fund and fee-based income fell, by 2% and 10%, respectively. Loans continued to show traction at 2% but NIM fell by 6bps to 1.9%. Weak top-line forced CIR to surge ahead by 3ppts to 61%. Asset quality was mixed as GIL fell 10bps to 1.8% but a credit cost of 33bps was recorded for the quarter.

Outlook. We are encouraged by commendable performance in loans YoY with both SMEs and residential properties) surging ahead after a soft 2Q. Loans growth will be supported by growth from both business banking and commercial banking. With loan traction on an upward momentum, its T4 aspirations are still on track. We expect NIM to be healthy due to portfolio rebalancing and the focus of both commercial and business banking.

Earnings revised for FY18E. We revised our FY18E earnings by -8% to RM1.33b on account of: i) credit costs of 4bps vs. credit recovery of 4bps, and (ii) MSS costs of RM120m (vs. 70m previously). The rest of our assumptions for FY18E remains; (i) loans growth <5% (unchanged), (ii) NIMs at 1.94% (unchanged) and (iii) CIR of at <58% (unchanged). No change to our FY19E earnings as we had factored in a credit cost of 8bps with the following conservative assumptions i) loans growth <5% (unchanged), (ii) NIMs improved by 4bps (unchanged) and (iii) CIR of at <54% (unchanged).

TP maintained with call upgraded. We maintained our TP of RM4.90 based on a blended FY19E PB/PE ratio of 0.8x/9.4x. The PB (at -1SD below mean) is to reflect challenging ROE ahead (impacted by MFRS9) and PER (-1SD average mean) to reflect our cautious optimism for loans ahead. With loan upward momentum maintained coupled with elevated NIM and superior dividend yield of 5%, we upgrade our call to OUTPERFORM as valuations are undemanding.

Risks to our call are: (i) lower-than-expected margin squeeze, (ii) lower- 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 - 01 Mar 2018