The tide is turning

Sustained deliveries justify our positive view; upgrade to BUY. It has been six months since CEO, Dato’ Sulaiman, unveiled AMMB’s strategic direction and key aspirations to drive the banking group to greater heights by 2020. In FY17/18, AMMB’s aspires to achieve ROE of 8.5/10% and 5/10% net profit growth p.a. and cost-to-income ratio of <57%/50%. These are premised on: (1) focused growth segment (mass affluent, affluent, SMEs, mid-sized corporations), (2) products focus (cards, transaction banking, markets, wealth management), and (3) sustaining its position with its current engines (corporate loans, debt capital markets, asset management). AMMB has successfully stayed on track with its NIM and cost-savings targets. Sustained deliveries of these will justify our positive view on the banking group. Upgrade to BUY.

Watching key trends. In coming quarters, we will monitor the following metrics to closely track sustained improvements: NIM. SME loans, NPL trends in vulnerable segments, CASA and capital. In addition, we would also track its non-interest income traction resulting from its product-focus initiatives as well as insurance. Noises at shareholder’s level.

Noise at the shareholder level, namely ANZ, is expected to hog the limelight. In Jun 16, ANZ lowered its carrying value of AMMB to 0.9x BV (from 2x BV when it acquired the stake). In Oct 16, ANZ sold its retail and wealth business to DBS, and in Jan 17, it disposed of its 20% stake in Shanghai Rural Bank. This indicates ANZ’s direction in selling its minority stakes in Asia, which may include AMMB. We note that ANZ’s influence on the bank’s daily operations is minimal. As such, we do not expect material disruptions to the bank should this event unfold. AmCorp Group’s exit could be a wildcard. Combined, this would be an event risk for the stock.

Valuation:

We upgrade AMMB to BUY (from HOLD) with its TP rising to RM5.00 as we raise our FY18-19F earnings by 3-5% for lower expenses. Our TP is derived using the Gordon Growth Model (assuming 10% ROE (previously 9%), 10% cost of equity, and 3% long-term growth). Any added boost to AMMB’s valuations may hinge on corporate events that may unfold.

Key Risks to Our View:

Inability to deliver on strategic goals. We believe there will be risks to the share price performance if AMMB fails to deliver quick wins from its strategic initiatives.

Source: Alliance Research - 18 Jan 2017