Kenanga Research & Investment

AMMB Holdings - Credit Cost and NIMs to Hail Onward

kiasutrader
Publish date: Wed, 21 Aug 2024, 12:56 PM

AMBANK’s 1QFY25 net profit was within expectations with signals for low credit cost levels to sustain as the group utilises on forward-looking provisions and overlays. Thanks to a focus on higher-margin loans and streamlining of unfavourable deposits, the group will likely have better reins on its NIMs with previously mentioned strategies to follow suit. We tweak our FY25F/FY26F earnings by +4% each and raise our TP to RM5.50 (from RM5.20) to reflect better confidence in our GGM inputs that ROE levels can be sustained (at 9.5%). Maintain OP.

1QFY25 met expectations. AMBANK’s 1QFY25 net earnings of RM500.2m made up of 27% of our full-year forecast and 28% of consensus full-year estimate.

YoY, 1QFY25 group net interest income came off slightly (-2%) Although conventional banking NII did expand by 10% thanks to better liability management keeping funding costs cheaper, this was offset by poorer Islamic banking business (-18%) where cost of funds appeared to be tighter. This kept group NIMs at 1.87% (-3 bps). Meanwhile, NOII saw a 9% expansion thanks to higher stockbroking and unit trust fees.

Though total income was flattish, 1QFY25 net profit grew by 32% to RM500.2m mainly attributed to large improvements in credit cost (11 bps, -40 bps). This was due to the reversal of past forward-looking provisions and a relatively healthier asset quality landscape. Management overlays of RM541m remains predominantly allocated to retail and RSME portfolios.

QoQ, 1QFY25 net income grew by 5% similarly from less stress to credit cost (albeit marginally by 1 bps) with CIR also coming off (-1.0 ppt) from relatively lower personnel expenses. Meanwhile, we gathered that conventional NIMs improved by 11 bps, similarly thanks to the abovementioned cheaper funding costs with asset yields indicated to remain stable.

Highlights. Strong headways in credit cost will likely be the largest supporter to near-term earnings. We also gathered the group’s assumption for ECL to be backed by a base case of 4.5% growth in CY24, which suggests a good likelihood for similar writebacks on forward-looking provision to sustain as economic prospects now appear more buoyant. Reflecting this, its past guidance of 30-35 bps credit cost for FY25 will now likely land at <30 bps.

We also note that the group’s liability management efforts are in fruition, with NIMs slated to sustainably improve with the exit of less profitable non-retail CASA accounts. Meanwhile, given the intent to target more profitable SME accounts, AMBANK may be excused should it demonstrate below-industry growth in its loans books (reporting at -1% YTD). All said, its NIMs outlook could have an upside-bias as compared to the group’s stable target.

Forecast. We revise our FY25F/FY26F earnings up by 4% each following marginal improvements to NIMs by 2-3 bps and softer credit cost assumptions.

Maintain OUTPERFORM with a higher TP of RM5.50 (from RM5.20). In light of more sustainable earnings for the group with regards to better NIM management as well as lower loan provisioning needs in the medium-term, we opt to raise our ROE inputs from 9.0% to 9.5% in our GGM, translating to a higher applied CY25F PBV of 0.89x (from 0.80x). Our COE input of 10.2% and TG of 4.25% are unchanged.

We believe a 10% ROE for AMBANK could be realisable in the long-term as it progressively builds a larger portfolio of SME accounts (now possibly hindered by more selective onboarding). Meanwhile, the group may also capitalise on normalising MGS rates to realise better positions in its fixed income books or issuance services (we note that 1QFY25 fair value reserves sit at RM719m which have potential to be monetised). Undermining this would be a revitalisation of deposits competition in chasing OPR movements.

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 - 21 Aug 2024

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