1QFY24 reported net profit of RM378.4m (-8% YoY) missed expectations given higher-than-expected provisioning needs reflected by the group. This led us to cut our FY24F/FY25F earnings by 14%/12%. We still believe AMBANK is fundamentally solid for its income stability and sound cost management. Maintain OP with a lower GGM-derived PBV TP of RM4.45 (from RM4.80). AMBANK is one of our 3QCY23 Top Picks on a renewed consolidation angle.

1QFY24 below expectations. 1QFY24 reported net earnings of RM378.4m made up 20% of our full-year forecast and 22% of consensus full-year estimate. We deem this to have missed expectations as the group guided higher credit cost which dampens overall earnings. This was due to higher forward-looking provisions amidst softening macro prospects. No dividend was declared, as expected given that the group typically pays biannually.

YoY, 1QFY23 total income rose by 10%. Net interest income improved by 5% on the back of loans base increasing by 7% amidst softening net interest margin (NIM) at 1.90% (-10 bps) from higher funding cost. Meanwhile, non-interest income (+30%) benefited from a comparatively better investment and trading sentiment alongside higher fee-based income. Cost-income ratio was better at 44.5% (-0.5ppt) as cost management improves. On the flipside, credit cost surged to 51 bps (+31 bps) in relation to higher staging requirements from more cautious forward-looking provisions. Overall, this led 1QFY24 profit from continuing operations to decline by 8% to RM378.4m. Discontinued operations pertains to AmGeneral which was disposed in Jul 2022.

Briefing highlights. The group offered some caution with its FY24 guidance for RM400m net earnings per quarter (or RM1.6b, -8% YoY). That said, several fronts are still expected to show resiliency:

1. While the group had registered a 7% growth in loans base, it opines it may be able to deliver a better 2HFY24 performance on the back of sustained demand in household loans, with domestic demand expected to pick up.

2. NIMs are expected to flat line post 1QFY24 delivery as the group observes that funding cost compression has ceased. It does not anticipate further OPR hike which could translate to similar NIM readings for the rest of the year.

3. With regards to impairments, the group opines that it would continue to impute further allowances owing to prudence given growing perceived risks. Although we had anticipated for 2QCY23 to see hiccups in repayment trends due to Raya festivities, it had called for a tightening of the group’s repayment assistance books as an estimated RM7.5b are still in observation.

4. The group believes it has full grasp of its cost structures and aims to maintain, if not reduce its overall expenses from c.RM2b in FY23. That said, we believe the costs which may be at risk of exceeding the group’s budget could be personnel cost should they decide to expand overall business engagement going forward.

Forecasts. Post results, we cut our FY24F/FY25F earnings by 14%/12% mainly on higher credit cost inputs.

Maintain OUTPERFORM but with a lower TP of RM4.45 (from RM4.80). Our TP is based on a GGM-derived CY24F PBV of 0.74x (COE: 10.7%, TG: 4.25%, ROE: 9.0%) from 0.78x as we lower our ROE inputs. Despite a slightly more conservative fundamental landscape, we continue to believe our thesis that AMBANK is still in a better shape for consolidation. On top of securing sustainable ROEs of c.9% (since FY19 of <9%), the group may now be in a better position to deliver better dividend payouts of c.40% (from 35%) which we are anticipating. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us. AMBANK is one of our 3QCY23 Top Picks.

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 Aug 2023