1QFY23 earnings of RM419.2m (+8%) came within expectations. AMBANK should continue to report stronger earnings thanks to credit cost improvements with possible excitement from the successful disposal of its AmGeneral stake to Liberty Insurance. Participation in the enlarged entity could yield a better payoff for the group in the long-term, calling for higher ROE targets. Maintain OP with a higher GGM-derived TP of RM4.75 (from RM4.35) on better long-term assumptions.

1QFY23 met expectations. 1QFY23 PATAMI of RM419.2m is within our/consensus expectations, accounting for 26%/27% of respective full-year projections. No dividends were declared, as expected. The group typically pays its dividends biannually.

YoY, 1QFY23 total income eroded by 4%. NII (+4%) rose thanks to a larger loans base (+4%) backed by relatively stable NIMs (2.07%, -2bps) but was mitigated by the erosion of NOII (-23%) largely owing to investment revaluation losses and dents in derivative trading. Alongside a higher CIR of 46.9% (+6.1%) on higher personnel charges, PPOP tapered down by 14%. That said, provisioning needs improved as economic recovery hoisted client cashflow and repayment habits, leading to impairments to fall by 70% (inclusive of RM30m overlays added to the construction sector). Ultimately, this led 1QFY23 PATAMI to gain 8% at RM419.2m.

Briefing’s highlights. The group believes there is little hindrance in achieving its FY23 targets of: (i) 7% loans growth, and (ii) CIR of <45%. Two possible OPR hikes could be a net benefit for the group as it would support NIMs against competitive pricing pressures while economic recovery would support loans demand. Provisions may see some adjustments with the higher rates but it should not be significant enough to steer its 35-40 bps credit cost target for FY23. Meanwhile, the repayment assistance books now make up only 5% of total loans with the progressive exit of rehabilitated accounts, of which 40% are re-enrolling.

AmGeneral disposal to yield positive returns. With the completion of AmGeneral disposal (now a 30%-owned associate), the group is confident that its new partner, Liberty Insurance Berhad could take its insurance segment to new heights. The combined entity stands to become the largest auto insurer in Malaysia and the added synergies could boast net contributions to PATAMI. This called for the group to increase its ROE guidance to at least 10% from a range guidance of 9.3-10%. Post completion of disposal, AMBANK received a RM304m cash consideration and an additional RM959m in equity interest value from its 30% stake in the combined entity.

Post results, we tweak our FY23F earnings by +1% from model updates. While we match management’s guidance in most aspects, we hold on to slightly more conservative ROE readings amidst macro uncertainties.

Maintain OUTPERFORM with a higher TP of RM4.75 (from RM4.35). We raise our GGM inputs to reflect a greater confidence in the stock’s ROE delivery, leading to a new applied CY23F PBV of 0.84x (COE: 10.7%, TG: 3.5%, ROE: 9.5%, from 9%). We believe interest in the stock will continue to hold from its earnings traction recovery and with targeted ROE levels of 10%, a level not seen since 2017, where its valuations were closer to 0.9x. That said, we do not expect special dividends from the disposal of AmGeneral stake as the group only registered a net disposal gain of RM5m. There is no adjustment to our TP based on ESG of which it is given a 3-star rating as appraised by us.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 18 Aug 2022