We are downgrading our recommendation on AMMB to NEUTRAL from Buy.  There  is  no  change  to  our  FV  of  MYR8.35  (13.0x  CY14  EPS),  but following  a  nice  run-up  in  share  price  YTD,  valuations  now  appear  fair to  us.  Results-wise,  1QFY14  earnings  were  within  expectations.  With credit  cost  and  overheads  set  to  rise  in  the  quarters  ahead,  income growth will be of importance to sustain bottomline growth.

- Results  in  line.  AMMB’s 1QFY14  results  were  in  line  with  our  and consensus expectations. Its net profit of MYR468m (+6% y-o-y; +15% q-o-q)  made  up  26%  of  our  and  25.5%  of  consensus  full-year  earnings estimates  respectively.  The  results  were  aided  by  a  MYR20m  net writeback  in  loan  impairment  allowances,  thanks  to  chunky  recoveries during  the  quarter.  Pre-impairment  operating  profit,  however,  came  in 8% below our estimates, when annualised.  

- 1QFY14  highlights.  Positives  were:  i)  healthy  non-interest  income (+20%  y-o-y;  +13%  q-o-q)  –  non-interest/total  income  improved  to  34% (4QFY13 and 1QFY13: 31%); ii) 4% q-o-q drop in overheads, thus, cost to income ratio (CIR) declined to 47.3% from 50.8% in 4QFY13; iii) loan impairment  writeback  (unlikely  to  be  sustainable);  iv)  robust  current account savings account (CASA) growth, resulting in CASA ratio hitting a new  high  of  20.6%;  and  v)  further  improvement  in  asset  quality.  The main  negative  relates  to  the  subdued  net  interest  income  (+5%  y-o-y;  -1% q-o-q) due to pressure on net interest margin (NIM). NIM was down an estimated 17bps y-o-y (9bps q-o-q), largely due to pressure on asset yields.  In  our  view,  growing  operating  income  will  be  key  to  sustaining bottomline growth momentum in the coming quarters. This is because of costs pressures stemming from normalising loan impairment allowances and  synergistic  benefit  cost  of  MYR45m  in  relation  to  the  Kurnia  and MBF Cards acquisitions.   

- Forecasts. No change to our earnings forecasts.

- Investment  case.  Our  MYR8.35  FV  remains  unchanged  and  is  based on  target  CY14  P/E  of  13.0x.  We  are  positive  that  AMMB  has  stayed disciplined and focused in executing its strategies. Y-o-y loan growth has been decent despite the focus on profitable and viable segments, asset quality  has  been  improving  while  CASA  continues  its  healthy  growth. That  said,  the  stock  is  up  17.1%  YTD  vs  the  FBM  KLCI’s +5.9%. Following the run-up in share price, valuations now appear fair and share price performance is now set for a breather, in our view. As such, we are downgrading our recommendation to NEUTRAL from Buy. 

Source: RHB