AMMB’s 2QFY15  (Mar)  results  met  our and  consensus expectations.  A much  improved  set  of  results  together  with  low  valuations  means  we retain  our  BUY  call,  albeit  with  a  revised  TP  of  MYR7.45  (14%  upside). Underlying trends were generally positive this quarter, with 2QFY15 net profit  up  35%  QoQ  (underlying  basis),  driven  by  a  combination  of  NIM expansion, tight cost control and lower credit cost. 

Results  in  line.  AMMB’s 2QFY15 (Mar)  net  profit  of  MYR446m  (+1% YoY,  +35%  QoQ,  ex-lumpy  items  in  1QFY15)  was  within  expectations, with  1HFY15  net  profit  of  MYR983m  (-4%  YoY,  underlying  basis) accounting  for  51%  of  our  and  consensus  full-year  net  profit  estimates.  An interim DPS of 12 sen (2QFY14: 7.2 sen, net) was declared.

2QFY15  highlights.  Positives  were:  i)  estimated  13bps  QoQ  (-6bps YoY)  expansion  in  net  interest  margin  (NIM),  aided  by  July’s 25bps overnight  policy  rate  (OPR)  hike.  Hence,  net  interest  income  rose  3% QoQ despite the weak loan growth, ii) a 7% QoQ rise in underlying non-interest  income,  driven  by  higher  forex  and  other  income,  iii)  tight  cost control (-7% QoQ, -12% YoY), and iv)  an improvement in asset quality, leading  to  annualised  credit  cost  of  just  3bps  in  2QFY15  (vs  1QFY15: 53bps;  2QFY14:  7bps).  The  main  negative  was  the  weak  loan  growth, although  partly  deliberate.  Deposit  base  also  contracted,  resulting  in  a higher loan-to-deposit ratio (LDR).

Loans and deposits. Gross loans fell 1% QoQ (+1% YoY), partly due to deliberate  tightening  of  credit  policies  in  the  auto  and  non-residential segments  amid  asset  quality  concerns  as  highlighted  in  the  previous briefing. Apart from that, corporate loans were down 2% QoQ due to the rollout  of  a  new,  streamlined  wholesale  banking  model.  Wholesale lending  momentum  has  since  improved  post  quarter-end.  Deposits  fell 2%  QoQ  and  3%  YoY  while  current  account  and  savings  account (CASA)  deposits  declined  9%  QoQ  (possibly  due  to  lumpy  corporate balances) but were up 4% YoY. Overall, group LDR rose 80bps QoQ to 99.3% while CASA ratio fell 150bps QoQ to 20.1%.

Asset quality. Absolute gross impaired loans declined 6% QoQ and 7% YoY,  aided  by  higher  write-offs  while  impaired  loan  formation (annualised)  was  stable  QoQ  at  around  204bps.  Thus,  the  gross impaired loan ratio improved by 8bps QoQ and 16bps YoY to 1.8%.  

Forecasts  and  investment  case.  We  trim  our  FY15-16  net  profit projections by 3-4% amid lower loan growth assumptions. We lower our TP to MYR7.45 (from MYR8.00) but maintain our BUY call.

Briefing highlights

FY15 KPIs disclosed include: i) net profit growth of c. 8% (from c. 10%), ii) ROE of c. 14% (from 14.2-14.5%), iii) cost-to-income ratio (CIR) not exceeding 45%, iv) gross impaired  loan  ratio  not  exceeding  1.9%,  and  v)  dividend  payout  ratio  of  40-50%. Management  has  also  guided  for,  among  others:  i)  a  NIM  contraction  of  15bps,      
ii) credit cost of 15bps (previously 30bps), iii) loan growth of 3% (previously 7%), and

iv)  non-interest  income  contribution  of  around  38%.  As  mentioned  earlier,  the  KPIs take  into  account  the  gain  from  the  sell-down  of  AmLife  and  AmTakaful,  as  well  as restructuring and investment costs. For FY16-17, AMMB’s KPIs are: i) net profit growth of 6-10%, ii) ROE of c. 14%,

iii) CIR  not  exceeding  44%,  iv)  gross  impaired  loan  ratio  not  exceeding  1.9%,  and  v) dividend payout ratio of 40-50%. Loan growth guidance was toned down again, as AMMB reduces its exposure to the vulnerable group (monthly income of <MYR3k) in order to preserve asset quality. The  proportion  of  new  business  coming  from  the  vulnerable  segment  has  fallen  to 17% in 1HFY15, vs 18% in FY14 and 30% in FY13. Together with the rebalancing of the  auto  loan  portfolio  (c.  30%  of  gross  loans)  and  cautious  stance  on  the  non-residential  properties  segment,  loan  growth  guidance  was  toned  down  to  3%  from 7%.  That  said,  AMMB  is  still  positive  on  sectors  such  as  oil  and  gas,  infrastructure and  agriculture  segments,  and  it  expects  wholesale  lending  activities  to  pick  up ahead.  In  the  near  term,  underwriting  better  quality  loans  will  put  margins  under pressure, but this should be more than compensated by improved asset quality and hence, lower credit charge-offs down the road.  Following  the  above,  we  lower  our  FY15/FY16  loan  growth  assumptions  to  3%/5% respectively from 7% p.a. previously. Deposit  competition  remains  stiff  and  continues  to  put  pressure  on  funding  cost. AMMB  remains  focused  on  growing  CASA  and  raising  funds  from  alternative sources, eg debt funding. Investment  banking  (IB)  outlook.  Management  appeared  optimistic  that contribution  from  debt  capital  markets  and  investment  banking  should  improve  in 2HFY15.

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

Forecasts 
Following the  above,  we  lower  our  FY15-16  net  profit projections by  3-4%. We now expect net profit growth of 5-6% and ROEs of 13.4-13.7% for FY15-16, slightly more conservative than management’s KPIs. We also introduce our FY17 numbers in this report

Valuations and recommendation 
We lower our GGM-based TP to MYR7.45 from MYR8.00 on the back of the earnings revisions above, a roll forward in valuations and an update in GGM parameters. Our GGM  assumes:  i)  revised  COE  of  10.2%  (from  9.8%),  ii)  ROE  of  13.0%  (previously 13.5%), and iii) 4.5% long-term growth. Our TP implies a 2015 P/BV of 1.5x, in line with the stock’s 10-year average P/BV of 1.5x. We believe this is conservative given our  FY15-17  ROE  projections  of  about  13-14%  compared  with  the  high  single-digit ROEs AMMB used to post on average over the past 10 years.   After reporting a soft set of “underlying” numbers in 1QFY15, we are heartened by the improvement in its 2Q numbers. We are also encouraged that the group remains disciplined  and  focused  on  executing  its  strategies.  While  some  of  these  measures may result in “short-term pain”,  eg  muted  loan  growth,  the  longer-term  benefits  (eg 
improved  asset  quality)  should  more  than  outweigh  the  near-term  setbacks,  in  our view.  Finally,  the  stock  was  sold  down  post  its  1QFY15  results,  amid  concerns  of weakening financials. Consequently, AMMB currently trades at 2015 P/E and P/BV of 10x and 1.3x, below its 10-year average P/E and P/BV of 14x and 1.5x respectively. We  believe  the  underlying  trends  displayed  in  its  2Q  results  would  help  assuage investors’ concerns above and the sell-down may have been overdone. Thus, we are keeping our BUY call on the stock.

Financial Exhibits

Financial Exhibits

SWOT Analysis

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.

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Source: RHB