We maintain our OUTPERFORM call and GGM-derived PBV TP of RM5.05 (COE: 10.7%, TG: 4.0%, ROE: 9.5%). Reflecting on past headlines concerning possible M&As involving AMBANK, we opine that its current fundamental outlook and prevailing macro climate could present more palatable opportunity for both AMBANK and prospective buyers.

Prime candidate for consolidation. AMBANK had been said to be in talks with several financial institutions (including RHBBANK and Grab) over the past few years. The failure thus far for any deal to materialise could be attributed to: (i) impasse regarding pricing, and (ii) changes in operating environment. However, considering the factors below, we opine that the prospects for talks of consolidation could now be brighter.

1. Sustainable industry outlook. No thanks to Covid-19 restrictions in 2020, the banking sector was marred by moratoriums and repayment assistance programs used as counter measures against pains suffered during economic lockdowns. The result of which were deterioration in asset quality and slowing economic activities. At present, we believe a sense of confidence has been reinvigorated in this space, particularly as impairment needs have rationalised. While loans growth may see some challenges in line with GDP expectations, we opine its resilience has been proven.

Our projected EPS growth of 7%/10% for AMBANK for FY24F/FY25F is reflective of such readings, with expected ROEs to linger close to 10% which were stronger than pre-Covid years. The group’s RM2.83b global settlement payment to the Ministry of Finance in 2021 is also expected to be a one-off item.

2. Fairer valuations. Spurred by the abovementioned, AMBANK saw its forward PB valuations drop to its lowest point at 0.55x in July 2021. The heightened uncertainties then even alluded that AMBANK would require a further discount for a deal to occur.

With fundamental strengths established and past development under wraps, AMBANK had reverted to historical levels of 0.70x forward PBV before diminishing again but this time from a sector wide de-rating owing to unfavourable developments in the global banking scene (refer to the overleaf for AMBANK’s forward PBV trends).

We opine that for long-term recovery to continue, a 0.70x forward PBV valuation price tag would be a more acceptable price for stakeholders. A premium from this could also be applied for the group’s increasing presence in the fast-growing SME space. Arguably, AMBANK is also more fundamentally sound now with cost-income ratios staying below 50% (as compared to pre-Covid averages of 60%).

3. Social impact more manageable. There are always concerns over social impact of banking sector consolidation, especially potential job losses. We believe such concern was particularly pronounced prior to the economy reopening and the latest general election. Now with a more stable job market post the pandemic and a new mandate given to a new government, we believe various stakeholders will be more open to the idea of banking consolidation that will ultimately bring long-term benefits to the economy.

Maintain OUTPERFORM and TP of RM5.05. Our TP is based on an unchanged GGM-derived CY24F PBV of 0.82x (COE: 10.7%, TG: 4%, ROE: 9.5%). The above discussion provides a more speculative angle for the stock. That said, we do believe the group could do well fundamentally as a key beneficiary of the economic recovery from its notable SME loans profile (21%) with asset quality concerns on household sector aside. The group also seeks to enjoy a better long-term growth trajectory from more aggressive partnerships against its peers. 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 - 22 Jun 2023