AMMB’s post-results briefing last Friday offered greater clarity on 3M20 earnings; improved CIR, surge in investment & trading income and further credit recoveries were pleasant surprises while pedestrian loans growth (+3% YoY and -1% QoQ) was not unexpected. We expect AMBANK’s earnings to be supported by better NIM as management’s targets to recover the higher-margin auto loan market. And should monetary conditions ease further as expected, there may well be further investment & trading income gains from fixed income portfolios. We do not expect significant write-backs for the financial year ahead but its strong credit recoveries should provide benign credit charge. TP lowered to RM4.75 as we roll over valuation to FY21 (ascribing a lower PBV) but maintain OUTPERFORM due to undemanding valuations.

Recap. 3M20 CNP of RM392m came in-line with both our/market expectations accounting for 27%/28% of our/market estimates. Topline is commendable with improving asset quality. YoY, 3M20 CNP improved as top-line improved 5% with operating profit surging 15% as write-backs improved >+100% to RM45m (The higher write-backs come mostly from corporate loans). The improving top-line was driven by both NII and NOII which rose 9% and 7%, respectively, with the latter driven by investment & trading income surging >+100% to RM86m as Insurance business struggled (-21%) due to higher claims and commission as income from insurance business improved by only 4%. NII improved due to improvement in loans (>+2% vs. system at +4% vs. estimation of ~+5%) although reported NIM compressed by 15bs. CIR improved by 110bps to 50% (vs. guidance of 52% and industry of 48%. Asset quality improved as GIL fell 11bps to 1.66%. QoQ, CNP fell 15% primarily due to the absence of large recoveries (as 4Q19 saw writebacks of RM272m due to NPL sale). Nevertheless, top-line improved +10% driven by NII and NOII (+11% and +21%). NOII was driven by net insurance income (+52% to RM121m). NII was driven by higher NIM (+7bps) as loans fell 1% (primarily due to large corporate repayments). The improved NIMs were supported by the group’s reducing its excess liquidity supported by better asset pricing. There was an uptick in asset deterioration by 7bps to 1.66%.

NIM looking to expand. 3M20 ROE of 8.5% was within guidance of ~9% despite loans falling below expectation. However, NIM was in line with guidance but credit recoveries sprung a surprise. Moving forward, management expects NIM to expand 7-9bps. NIM enhancement will be supported by realigning its strategy to re-grow its auto loan book. Unlikely for massive write-backs ahead, with credit costs expected at 10 to 15bps. Loans growth is a concern, but we expect loans to grow in tandem with GDP, thus FY20 loans growth estimated at ~4.5%.

Earnings revised upwards. We revised our FY20E assumptions; (i) NIM at 5bps uptick (-3bps compression previously), ((ii) CIR of 51% (from 53% previously), (iii) revised loans growth at +4.5 (previously >+5%), and (iii) credit costs at 10bps (from 8bps previously), thus raising our FY20E earnings by ~4% to RM1.5b (giving a potential ROE of 8.3%). Maintain OUTPERFORM but a lower TP. Our TP is lowered to RM4.75 (from RM5.10) as we roll over our valuation base to FY21. Lowered target PB ratio of 0.77x (implying a 0.5SD below mean) from 0.83x previously is to reflect the risk on slower loans and NOII due to externalities but mitigated by operational efficiency, which would see benign credit charge (among its peers) and better NIM. Undemanding valuations with dividend yield attractive at 5.3% and with total potential upside of +20%, we maintain our OUTPERFORM call.

Source: Kenanga Research - 26 Aug 2019