AMBANK performed spectacularly for FY19 due to credit recoveries of RM300m despite higher than expected NIM compression. Moving forward, management expects ROE of 9%, which we find challenging given the uncertainties ahead, but management guided for further NPL sale, which would contain credit cost. As valuations are undemanding, we maintain our OUTPE and RM call but with a higher TP of RM5.10.

In line. 12M19 CNP of RM1.50b came in-line with both our/market expectations accounting for 104% of both estimates. A final DPS of 15.0 sen was declared making up the full-year DPS of 20.0 sen (implying a payout ratio of 40%) vs our estimate of a DPS of 16.0 sen.

Earnings bolstered by recoveries. YoY, 12M19 CNP of RM1,505m improved by +33.0% as credit recoveries kick in (RM301m) and on lower opex (-12% to RM2,131m). As evident in the last 3 quarters, topline was soft falling 11%, dragged by falling NOII at RM1,226m; weighed down by falling insurance income (-3%) and fee & commission income (-7%). NII moderated (+4%) on account of NIM (-16bps); despite loans gaining +5.7% (within guidance & expectations vs system loans of +4.9%. Compression was fuelled by both competitive asset pricing and cost of funds. CIR was commendable at 55% (vs guidance/industry of <55%/48%) mostly coming from personnel benefitting the MSS conducted in FY18. GIL improved by 11bps to 1.6% due to sale-off legacy NPLs which led to recoveries of RM301m (- 30bps credit recoveries).

Improvement in fee-based income. QoQ, CNP of RM460m improved 31% as writeback/recoveries from the NPL sale kicks in (at RM272m). Topline was flat owing to gains in NOII (+8%; due to mostly net gains in financial assets & investments) as both NII and Islamic banking fell 4% and 2% respectively. NOII contribution to topline rose 3ppts to 31% (vs average contribution to top-line of ~33%). Further improvement in asset quality to 1.6% (+4bps) with credit recoveries of 108bps.

FY20E ROE target looks challenging. Management guided for a target ROE of ~9% for FY20E which we find challenging given the current external risks prevailing. Given that its loans are skewed domestically, management is confident of continued traction on the loans front, with the continued focus on its preferred segments; mid corp, SMEs and corporate loans (coming from the revived infra projects). While the large NIM compression was a surprise (given management’s focus for surplus liquidity, we believe FY20E NIM compression would likely taper off given its LDR have come down to its lowest since FY15 (95%). On a positive note, management guided further NPL sale in FY20, which would contain credit charge <10bps.

Earnings revised upwards. Given our FY20E assumptions of i) loans at +5.2% (unchanged)), ii) credit costs at 8bps (from 22bps previously) and unchanged CIR of 53% we raised our FY20E by ~8% to RM1.43bm (giving a potential ROE of 8%) and introduce our FY21E earnings at RM1.48b where we expect loan traction to continue and higher NIM but mitigated by higher credit costs.

Maintained OUTPERFORM with a higher TP. Our TP raised to RM5.10 (from RM4.95) maintaining target PB ratio of 0.8x (implying a 0.5SD below mean) to reflect the risk on slower loans and NOII due to externalities mitigated by operational efficiency, which would see benign credit charge. Valuations are undemanding; dividend yield attractive at +4.6% and with total potential upside of +21% we reiterate our OUTPERFORM call.

Risks to our call are: (i) higher-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 - 29 May 2019