AMMB's loan traction will continue for 1 HFY19, with credit costs likely lower than expected. Asset quality is to improve significantly by end of FY19E. BUY with a TP of RM4.50 circa PE ratio of 11.2x. We make no changes to our FY19E earnings of RM1.20b as we feel our assumptions are conservative enough; i) loans at 6% and ii) flattish net interest margins (NIMs). Dividend yield is still attractive at 4.0% with potential upside of 16%. 

We expect 1H19 loans to be at least comparable as 1H18 (+6.6% YoY) underpinned by SMEs, Mid-Corp and supported by the credit card space. A healthy loans growth of 6% is achievable for FY19. While concern of on-going global trade friction is prevalent, risks for the domestic SME space might not a concern, as both China and US might use other markets, including Malaysia as intermediaries to bypass the tariffs imposed. Hence management view that its SME's growth will not be affected in the long run. SME's are still focused on manufacturing, service and trade. 

We are positive on its steps to further protect its asset quality moving ahead especially in the mortgage space likely undermined by the potential slowdown in the economy. We understand that management have taken steps i.e. i) Aiming for a lower loan to value (LTV), ii) Shying away from borrowers whose income are <4k. We understand that its residential properties approval has dipped <70% mark, consistent with BNM's recent findings. Another positive note is that 80% of its mortgages are owner occupied with average ticket size for its residential property financing are RM250- 400k/unit. 

While gross impaired loans (GIL) for 1Q19 stands at 1.8% (or RM1.74b) we understand that RM600m are real estate related. However, steps are being taken to sell of these NPLs with sufficient buffer (2 to 3x) to recover these loans by end of FY19, which will reduce its GIL to 1.1%. 

Source: Rakuten Research - 19 Oct 2018