What’s New

• 3Q/9MFY17 earnings above expectations mainly on higher-than-expected recoveries

• Positive signs emerging for SME, cards and merchants business, cost management, and CASA

• On track to meet FY17 targets; setting a strong base for FY18 

• Maintain BUY; TP lifted to RM5.20

Showing some positive signs; maintain BUY. AMMB has successfully stayed on track with its NIM and cost-savings targets. Sustained delivery of these will justify our positive view on the banking group. AMMB’s key priorities in FY(Mar)17 include building up its SME, cards and merchants businesses, CASA penetration and cost optimisation initiatives; some of these were visible in 3QFY17. Judging from its 9MFY17 earnings performance, AMMB appears poised to deliver its FY17 targets: ROE of 8.5% and 5% net profit growth p.a. and cost-to-income ratio of <57% in FY17. With these set as its base for FY17, AMMB should be well positioned to deliver better earnings traction in FY18. AMMB’s preliminary FY18 targets are 10% ROE, 10% net profit growth and c. 50% cost-to-income ratio.

3Q/9MFY17 earnings above expectations. Net interest income was lifted by NIM from lower funding costs, and finally, loan growth (+4% q-o-q, +4% y-o-y) driven by mortgage and SME loans. Its merchant business penetration showed improvement and this led to additional CASA generation. Non-interest income was dented by the volatility of interest rates. Expenses were well contained but cost-to-income ratio escalated due to overall softer revenues. Its bottomline was yet again supported by recoveries despite higher collective allowances set aside during the quarter. Gross impaired ratio further improved. Its oil & gas exposure reduced by RM600m over the past nine months, currently at 3% of its total loans. AMMB continues to monitor its real estate (non- residential properties) loans which are at 9% of its total loans.

Expectations for the rest of FYMar17. Although NIM showed strong improvement this quarter, it is likely to taper off in the coming quarter. AMMB did pay up for some wholesale deposits towards end-Dec and this could edge up funding costs. Its loans have finally shown traction and should end FY17 at 5%.

Valuation:

We have a BUY rating with TP raised to RM5.20 as we lift our FY18- 19F earnings by 3-5% for higher recoveries, lower expenses but lower fee income. Our TP is derived using the Gordon Growth Model (assuming 10% ROE, 10% cost of equity, and 3% long-term growth). Any added boost to AMMB’s valuations may hinge on corporate events (e.g. M&A) 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 - 27 Feb 2017