AMMB’s 3QFY14 earnings, although within expectations, were a mixed bag.  Non-interest  income  remained  healthy  and  cost  control  was evident.  However,  a  jump  in  impaired  hire  purchase  (HP)  loans  may raise concerns  on its  asset quality and dampen sentiment in the near term. We keep our NEUTRAL call and MYR8.35 FV (13.0x CY14 EPS).

• Results  in  line.  AMMB’s  3QFY14  results  were  in  line  with  our  and consensus expectations, with 9MFY14 net profit of MYR1.3bn  (+9% y-oy) making up 74% of our and consensus FY14 earnings estimates.
• 3QFY14  highlights.  The  positives  were:  i)  non-interest  income  stayed healthy  (+7%  q-o-q;  +21%  y-o-y)  on  the  back  of  higher  gains  realised from its available-for-sale (AFS) portfolio, thus  non-interest/total income improved to 36.8% (3QFY13:  33.2%;  2QFY14: 35.9%);  ii)  a  4-5% q-oq/y-o-y  drop  in  overheads,  hence  the  underlying  cost-to-income  ratio (CIR)  was  lower  at  43.6%  (3QFY13:  46.5%;  2QFY14:  47.7%);  and  iii) 3bps  q-o-q  (-11bps  y-o-y)  expansion  in  net  interest  margin  (NIM)  but sequential NIM trends may be volatile. The main negative, in our view, was  a  jump  in  impaired  loans  for  HP  (+25%  q-o-q;  +36%  y-o-y)  to MYR611m.  Management  attributed  this  to  a  combination  of  teething issues  with  the  new  core  banking  pla tform  that  was  launched  in  Nov 2013 and some stress on the HP portfolio. The rise in HP impaired loans caused  the  net  impaired  loan  formation  rate  to  surge  to  246bps  in 3QFY14  (3QFY13:  128bps;  2QFY14:  113bps).  However,  absolute impaired  loans  ticked  up  just  3%  q-o-q  (+1%  y-o-y)  as  the  increased impaired loan formation rate was largely offset by higher write -offs.
• Loan and deposit growth.  Gross loans expanded by 1%  q-o-q  (+4% yo-y)  thanks  to  the  non-retail  segment.  Meanwhile,  total  customer deposits  fell  1%  q-o-q  (+6%  y-o-y)  while  current  account  and  savings account  (CASA)  deposits  climbed  5%  q-o-q  (+12%  y-o-y).  Thus,  the loan-to-deposit  (LDR)  ratio  rose  to  96.8%  from  94.7%  as  at  end-Sept 2013 while group CASA ratio rose 100bps q-o-q to 19.7%.
• Capital.  AMMB disclosed group common equity tier  1 (CET-1) ratio  of 9.2% as at end-Dec 2013.
• 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 keep our NEUTRAL call.

Briefing highlights
Management  left  FY14  KPIs  unchanged  but  admitted  that  some  full-year  numbers could come  in  at  the  lower  end  of  targets.  The  KPIs  for  FY14  include:  i)  net  profit growth of 10-12%, ii) ROE of 14-14.5%, iii) gross impaired loan ratio not exceeding 2%, and iv)  a  dividend payout ratio of 40-50%.  Other FY14 estimates include NIM compression of 10bps, credit cost of <20bps and loan growth of 7%. AMMB  expects corporate lending activities to gather pace in 4QFY14 while the debt capital market pipeline appears healthy in the next 12-15 month period.

We project FY14F  net profit growth of 10%,  at the lower end of  management’s KPI. However,  with  9MFY14  net  profit  growth  of  9%  y-o-y  and  4Q  typically  being  a seasonally  slower  quarter  (based  on  historical  trends),  there  is  a  risk  that  full-year earnings  growth  could  come  below  our  estimates.  Recoveries,  capital  marketsrelated  fee  income  and  trading  income  are  some  potential  swing  factors  for  4Q earnings, in our view. For now, we leave our forecasts unchanged.

Management  said  the  rollout  of  the  core  banking  platform had  resulted  in  teething issues  regarding  the  sending  out  of  reminders  to  borrowers  for  HP   repayments, which partly contributed to  the rise in impaired loans.  The increase was  also partly due  to  stress  on  the  portfolio,  management  believed,  and  that  it  will  take  AMMB about  three  months  to  identify  the  specific  pockets  of  stress.  Management  did  not think  this  was  systemic  but  remained  cautious  with  respect  to  consumer  lending ahead, particularly for property-related loans. In mitigation, AMMB highlighted that its collective allowance to loans (net of individual allowance) was 2.2% as at end -2013, significantly  above  the  minimum  1.2%  requirement  by  the  Bank  Negara  Malaysia (BNM).  There  are  no  plans  at  this stage  to  reverse any  excess  provisions.  AMMB also highlighted that the high ratio could also provide some buffer  in the event the quality of its HP portfolio deteriorates further.

As the core banking platform was only recently rolled out, the IT system integration for  MBf  cards  needed  to  be  pushed  back  to  FY15.  As  such,  AMMB  revised  its guidance on synergistic benefit cast for FY14 to MYR23.6m from MYR44m, but  this means that the cost for FY15 will now be higher at MYR31m (from MYR9m).

Finally,  with  respect  to  the new  reference  rate  framework,  management hopes  the new framework will lead to a more efficient mechanism for the transmission of risks to consumers  vs  the  current  base  lending  rate  (BLR)  framework  where  rate  changes mainly reflect the movement in the  overnight policy rate. This, AMMB thinks, should be positive for margins.

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, which is broadly in line with the stock’s 10-year average P/E of 13.5x. Our FV implies 2014 P/BV of 1.8x, a premium to the 10-year average P/BV of 1.5x. We believe the premium is fair,  given our FY14-15F ROE projections of 14-15%, compared with  the high single-digit ROEs AMMB used to post, on average, over the past 10 years. We  are  encouraged  that  AMMB  remains  disciplined  and  focused  on  executing  its strategies. However, the stock lacks catalysts in the near term, in our view. The sharp rise  in  impaired  HP  loans  may  also  raise  concerns  regarding  its  asset  quality  and dampen sentiment towards the stock. Thus, we keep our NEUTRAL call. 

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

Source: RHB