We maintain our OP call and GGM-derived PBV TP of RM4.75 (COE: 10.7%, TG: 3.5%, ROE: 9.5%). AMBANK held its inaugural Digital Day yesterday where it shared its digital strategies to strengthen operations. This all ties in with the group’s long-term targets and future-proof against potential competition arising from eventual digital banking entries in the coming years.

The group opined that ongoing efforts would aid the group in achieving its FOCUS8 FY24 ROE targets to be sustainably above 10%. Our key takeaways from the abovementioned Digital Day event are as follows:

- Fuelled by RM250m annual investments. The group indicated an annual spend of RM250m to support its digital transformation initiatives. Emphasis on data analytics would be essential in streamlining infrastructure and to understand consumer behaviour better. With a more effective engagement, customer experience could be improved which may translate to stickier accounts and encourage more transactions with the group. That said, we believe this guided allocation of 12% of overall operating expenses is well factored in our model assumptions, as it could also be seen as a migration from traditional establishment costs.

- Partnerships for a more compact ecosystem. To establish a more comprehensive network of offerings, the group is progressively building a growing portfolio of collaborators. These include companies in telco networks, logistics as well as financial and investment services sectors. Via its partnerships, all parties would benefit from a wider sales distribution for more seamless cross-selling opportunities and customer onboarding. Meanwhile, the greater accessibility could provide entry to previously untapped market in the retail and business segments.

- E-wallet tie-in to bolster digital services. In Oct 2022, the group launched its hybrid e-wallet with Merchantrade to form the Merchantrade Money app. Having a presence here would enable the group to participate in a growing e-financial services market which is seeing growing relevance as cashless transactions are becoming a norm. To date, the platform has the highest wallet size in the market of RM50,000 and supports multi-currency transactions.

- Wary of digital banking threats. When they do commence operations in CY23-24, digital banks would likely be aggressive in targeting microlending clients per Bank Negara’s mandate and could progressively encroach into the significant larger traditional banking market share in the medium term. With that in mind, the group believes that its efforts would cement their brand identity going forward and enable them to compete competitively with its digital infrastructure and offerings already having matured by then. That said, we do not anticipate a shift in loans share in the near-term as digital banks are restricted by asset size caps of RM3b (vs AMBANK’s c.RM180b) during their 3-5 year foundational phase.

Forecasts. Post updates, we leave our FY23F/FY24F assumptions unchanged.

Maintain OUTPERFORM and TP of RM4.75. Our TP is based on an unchanged CY23F PBV of 0.84x (COE: 10.7%, TG: 3.5%, ROE: 9.5%, from 9%). We believe the group could be a key beneficiary of the ongoing economic recovery from its notable SME loans profile (21%). Meanwhile, the group’s possible re-entry as a KLCI constituent could spur buying interest from portfolio recalibration. This aside, we also 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, when valuations were closer to 0.9x. There is no adjustment to our TP based on ESG 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 - 9 Nov 2022