AMMB’s  2QFY14  earnings  were  within  expectations.  Non-interest income held up well and recoveries were healthy. These helped  offset weaker  net  interest  income  and  a  MYR40m  provision  it  recently announced  with  respect  to  AmFraser  clients’  exposure  to  three  SGXlisted stocks.  We keep  our NEUTRAL call and  MYR8.35  FV  (13.0x CY14 EPS).

• Results in  line.  AMMB’s  2QFY03/14  results  were in line with  our  and consensus expectations, with 1HFY14 net profit of MYR906m (+10% yo-y)  making  up  50%  of  our  and  consensus  FY14  net  profit  estimates. Pre-impairment operating profit came in 9% below our estimates, when annualised,  but  this  was  cushioned  by  another  quarter  of  chunky recoveries.  The  recoveries  also  helped  mask  a  MYR40m  pro vision  in relation to AmFraser clients’ exposure to three SGX-listed stocks.
•  2QFY14 highlights.  Positives were: i) non-interest income  held up well (+5%  q-o-q;  +79%  y-o-y)  thanks  to  its  insurance  unit.  Hence,  noninterest/total  income  improved  to  36%  (vs  2QFY13:  23.6%;  1QFY14:34%),  ii)  1%  q-o-q  drop  in  overheads,  thus,  cost-to-income  ratio  (CIR)was stable q-o-q at 47.7%,  and iii)  another quarter of healthy recoveries (MYR174m vs  1QFY14: MYR262m;  2QFY13: MYR143m), which helped keep  loan  impairment  allowances  low.  On  the  flip  side,  net  interest income remained subdued (-4% q-o-q; -1% y-o-y) due to pressure on net interest margin (NIM)  and soft loan growth. NIM was down an estimated 25bps y-o-y (-12bps q-o-q), largely due to pressure on asset yields.  Loan growth was guided down to 7% (from  10%),  while current account and savings  account  (CASA)  deposits  slipped  8%  q-o-q  due  to  volatile movements  in  corporate  CASA.  There  was  also  the  above-mentioned MYR40m provision relating to AmFraser.
• Dividend.  AMMB  declared  an  interim  single-tier  DPS  of  7.2  sen (2QFY13:  7  sen, net). We expect  a full-year net DPS of 23.9  sen, which will translate into a payout ratio of about 40%.
• Forecasts. No changes to our earnings forecasts.
• Investment  case.  Our  MYR8.35  FV  remains  unchanged,  based  on  a target  CY14  P/E  of  13.0x.  We  are  encouraged  that  AMMB  has  stayed disciplined and focused  on executing its strategies. However, the stock lacks catalysts in the near term, in our view. With credit cost set to rise in 2HFY14, income growth will be of importance. We keep our NEUTRAL call.

2QFY14 results review
AMMB’s 2QFY03/14 results were in line with our and consensus expectations, with 1HFY14  net profit of MYR906m (+10% y-o-y) making up  50% of our and consensus FY14  earnings  estimates.  Pre-impairment  operating  profit  came  in  9%  below  our estimates,  when  annualised,  but  this  was  cushioned  by  another  quarter  of  chunky recoveries.  The  recoveries  also  helped  mask  a  MYR40m  provision  in  relation  to AmFraser clients’ exposure to three SGX-listed stocks.

2QFY14  net  interest  income  was  weak  (-4%  q-o-q;  -1%  y-o-y)  largely  on  NIM pressure (-12bps q-o-q; -25bps y-o-y). Average asset yield was lower (-10bps q-o-q; -31bps  y-o-y),  with  pressure  partly  coming  from  lower-yielding  mortgages  while deposit growth outpaced  loan growth, resulting in LDR declining to 94.7% as at end -2QFY14 (end-1QFY14 and end-2QFY13: c. 96.5%).  Not helping either was the tepid loan growth. Looking ahead, management expects asset yields to start levelling off as  mortgage  growth  slows  down,  which  would  help  ease  some  pressure  on  NIM.

AMMB  continued to guide for NIM compression of c.10bps  for FY14 while for FY15, the pace of contraction is expected to moderate further.2QFY14  non-interest income held up well (+5% q-o-q; +79% y-o-y),  led by stronger contributions  from insurance (+18% q-o-q; +>100% y-o-y thanks to  the  acquisition of Kurnia).  Fee  income  was  also  higher  (+4%  q-o-q;  +22%  y-o-y),  given  stronger corporate advisory fees (q-o-q) and merchant fee income  following the acquisition of MBF  Cards  (y-o-y).  AMMB,  however,  reported  a  MYR7m  loss  from  trading  and investment  during  the  quarter  due  to  challenging  market  conditions  (1QFY14: MYR23m  gain;  2QFY13:  MYR38m  gain).  Overall,  non-interest  income/total  income rose to 36% in 2QFY14 (vs 1QFY14: 34%, 2QFY13: 23.6%).

Overheads  declined  1%  sequentially  but  were  up  23%  y-o-y.  The  y-o-y  jump  was largely a reflection of  the consolidation of Kurnia  and MBF  Cards expenses, as well as  higher  amortisation  charges  for  intangibles  (related  to  above-mentioned acquisitions) and a synergistic benefit cost of MYR7m. As such, CIR rose to 47.7% in 2QFY14 from the pre-acquisitions  CIR of 45.8% in 2QFY13. Q-o-q,  CIR was stable. With that, 2QFY14 pre-impairment operating profit was flat q-o-q but up 18% y-o-y. AMMB  enjoyed  another  quarter  of  net  writeback  in  loan  impairment  allowances (MYR11m  vs  1QFY14:  MYR20m  writeback;  2QFY13:  MYR13m  charge)  thanks  to chunky corporate recoveries amounting to MYR174m (1QFY14: MYR262m; 2QFY13: MYR143m).  While  management  does  not  expect  the  recoveries  ahead  to  be  as significant,  the  lumpy  recoveries  it  enjoyed  in  1HFY14  would  help  keep  full-year credit  cost  low.  Indeed,  AMMB  now  guides  for  credit  cost  of  <20bps  vs  20-30bps earlier.  The dampener this quarter, however, was the MYR40m provision booked in with  respect  to  AmFraser.  Management  stressed  that  these  was  client  exposure (gross exposure of c. MYR120m) and AmFraser did not take any proprietary position.

Also, the bulk of the client exposure was in relation to trades. Gross loans  contracted by 1% q-o-q (+6% y-o-y),  leading to annualised loan growth of 2%.  AMMB  attributed the sequential contraction in loan base  to lumpy corporate repayments.  Aside  from  that,  we  believe  growth  in  this  segment  was  impacted  by corporates’  wait-and-see  stance  post  the  General  Election.  For  the  retail  segment, growth was led by mortgages (7% annualised) but AMMB has taken a more cautious stance  with  respect  to  the  property  sector  and  is  very  selective  in  terms  of  its borrowers. With the weak loan growth YTD, management toned down  its  FY14 loan growth estimate to 7% from 10%. Nevertheless, this still implies stronger growth in 2HFY14, which management expects to be driven by ETP-related corporate lending. Meanwhile, customer deposits rose 1% q-o-q/6% y-o-y (8%, annualised)  and hence, the  loan-to-deposit  ratio  (LDR)  declined  to  94.7%  as  at  end-Sep  2013  (end-June 2013:  96.4%;  end-2QFY13:  96.5%).  CASA  slipped  8%  q-o-q  (+15%  y-o-y)  due  to volatile movements in corporate CASA. Consequently, CASA ratio declined to 18.7% after hitting a high of 20.6% as at end-1QFY14 (end-2QFY13: 17.3%).

Absolute gross impaired loans rose 3% q-o-q (-8% y-o-y) due to lower recoveries and writeoffs  during  the  quarter,  but  impaired  loan  formation  was  lower  at  113bps  vs 1QFY14’s 158bps. Together with the drop in loan base, AMMB’s gross impaired loan ratio  rose  7bps  q-o-q  to  1.95%  (2QFY13:  2.22%).  Loan  loss  coverage  (LLC)  also declined  to 129% from  132% at end-June, but remained  above  the  system LLC of 97.6% and is one of the highest among Malaysian banks.  

Proforma group CET-1 was 9.5% as at end-September, up 80bps from end-June due to  the  inclusion  of  1H  profits.  AMMB  targets  to  complete  its  Internal  Rating  Based (IRB) model by FY15 and expects capital benefits to start accruing after  two to three years.

Other briefing highlights
AMMB’s FY14 KPIs  were largely  unchanged. These  include:  i)  net profit growth of 10-12%, ii) ROE of 14-14.5%, iii) gross impaired loan ratio not exceeding 2%, and iv) dividend  payout  ratio  of  40-50%.  However,  FY14  CIR  was  guided  up  to  not exceeding 47% from  not more than 46%. It appears that AMMB expects the revised credit cost to help compensate for the weaker  loan growth and higher CIR, leaving FY14 net profit growth estimates intact. We project FY14 net profit growth of 10%, in line with management’s KPI. This implies that AMMB will need to, at least, sustain its 1HFY14  profitability  in  2H.  We  do  note  that  in  recent  years,  2H  tends  to  be  a seasonally  weaker  period  for  the  group,  but  management  appears  optimistic  on keeping steady  profit levels  in 2H  due to stronger income growth (eg  stronger loan growth) and keeping overheads stable (vs 1HFY14). With  respect  to  the  potential  strategic  partners  for  the  life  and  takaful  businesses, AMMB targets to finalise its choice by end-2013.

Risks
The  risks  include:  i)  slower-than-expected  loan  growth,  ii)  weaker-than-expected NIMs,  iii)  a  deterioration in asset quality,  iv)  changes in market conditions that may adversely affect its investment portfolio, and v) overpriced acquisitions.

Forecasts
No changes to our earnings forecasts.

Valuations and recommendation
Our  MYR8.35 FV  remains unchanged and is based on  a  target CY14 P/E of 13.0x. We are encourage  that AMMB has  stayed disciplined and focused on executing its strategies.  However,  the  stock  lacks  catalysts  in  the  near  term,  in  our  view.  With further synergistic benefit cost to be incurred and  credit cost set to rise in 2HFY14, income growth will be of importance. We keep our NEUTRAL call. 

Company Profile
AMMB Holdings provides a wide range of financial products and services. Its business divisions cover retail banking, business banking, transaction banking, corporate and institutional banking, investment banking including funds management and stockbroking, mar kets, general insurance, life assurance and takaful. These business divisions offer both conventional and Islamic financial services.

Source: RHB