We downgrade AMMB to SELL from Neutral, with a revised MYR5.70 TP (11% downside). FY15 reported net profit met forecast, aided by lumpy gains from asset disposals. Underlying profit, however, was soft due to margin pressure and weak capital markets. Its ongoing move to de-risk the loan portfolio should be positive for asset quality further out but in the near term, we think underlying earnings are unlikely to excite.

• 4QFY15 (Mar) net profit of MYR519m (+12% YoY, +25% QoQ) was broadly within expectations, with FY15 reported net profit of MYR1.9bn (+8% YoY) making up 103% of our and 106% of consensus full-year net profit estimates, although comparison against consensus estimates will likely be hampered by whether the es timates have factored in the MYR476m gains from the disposal of stakes in AmLife, AmFamilyTakaful (AmTakaful) and AmFraser. FY15 core net profit slid 3% YoY to MYR1.6bn due to margin pressure and weak markets-related income.
• 4QFY15 highlights. 4QFY15 core pre-tax profit was flat QoQ (better non-interest income from treasury offset by seasonally-higher opex spending), but down 5% YoY (net interest margin (NIM) pressure and higher opex, partly cushioned by stronger non-interest income and loan impairment writeback). We estimate that 4QFY15 NIM slipped 8bps QoQ (-52bps YoY) due to pressure on asset yield from ongoing portfolio rebalancing efforts as well as stronger deposit growth.
• Loans and deposits. Loan base was flat QoQ/-2% YoY. AMMB’s ongoing move to de-risk its loan portfolio hampered growth as focus was on better risk-grade customers and away from auto finance. Corporate lending was also impacted by repayments. Deposits rose 2% QoQ/3% YoY and hence, group loan-to-deposit ratio (LDR) fell to 93.5% from 95.3% at end-3QFY15 (FY14: 97.2%).
• Asset quality. Absolute gross impaired loans fell 5% QoQ and YoY as the net impaired loan formation rate improved this quarter to 104bps from 246bps in 3QFY15 (4QFY14: 137bps). Loan loss coverage was slightly lower QoQ at 105% (3QFY15: 106%; 4QFY14: 127%).
• Dividends. A final single-tier DPS of 15.3 sen (4QFY14: 16.9 sen) was declared. Full-year DPS was 27.3 sen (FY14: 24.1 sen), translating into a payout ratio of 43%.
• Forecasts and investment case. We cut our FY16-17 net profit projections by 13-14% after updating for the FY15 results and introduce our FY18F numbers. We lower our GGM-based TP to MYR5.70 from MYR6.85 and downgrade our recommendation to SELL from Neutral.

Briefing highlights FY15 achievements broadly in line with KPIs, which were: i) net profit growth of c.8% (FY15: 7.6%), ii) ROE of c.14% (FY15: 13.9%), iii) cost-to-income ratio (CIR) not exceeding 45% (FY15: 46%, inclusive of acquisition and business efficiency expenses), iv) gross impaired loan ratio not exceeding 1.9% (FY15: 1.85%), and v) a dividend payout ratio of 40-50% (FY15: 43%). These KPIs take into account the gains from asset sales (AmLife, AmTakaful and AmFraser) as well as restructuring and investment costs.

FY16 KPIs revised on softer macroeconomic (macro) outlook. For FY16, AMMB’s revised KPIs are: i) net profit growth of 3-5% (underlying basis), ii) ROE of 12-12.5%, iii) CIR not exceeding 46%, iv) gross impaired loan ratio not exceeding 2%, and v) a dividend payout ratio of 40-50%. Apart from that, AMMB guided for, among others: i) NIM contraction of 15-20bps, ii) loan growth of 4-5%, and iii) noninterest income contribution of around 40%. These revised KPIs generally appear to be a downgrade from the FY16-17 KPIs AMMB had set out previously, which were: 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) a dividend payout ratio of 40-50%. Management said that the weaker macro outlook had prompted the downgrade. Macro conditions were also volatile and hence, AMMB did not provide any mediumterm ROE guidance. The search for a new group MD is still ongoing and management highlighted that there could be changes to the above KPIs once the new MD comes onboard.

NIM challenge from both asset and liability sides. The ongoing rebalancing of the loan portfolio mix will continue to impact loan growth and asset yields while funding cost is still under pressure. Earlier, AMMB had seen cost for wholesale deposits easebut cost has since picked up again. Management believes this is due to the impending regulatory requirements on liquidity coverage ratio s, which will take effect from 1 Jun 2015.

No front-loading from goods and services tax (GST). AMMB did not think there was any impact of front-loading pre-GST and hence, does not expect any drop-off in credit demand post the GST implementation.

Regulatory ratios. AMMB disclosed that the fully-loaded CET-1 ratio at the holding company level was 9.8% as at end-Mar 2015 while the LCR for AmBank, AmBank Islamic and AmInvestment were all above 100% (minimum required LC R of 60% by 1 Jun 2015).

Risks The risks include: i) stronger-than-expected loan growth, ii) better-than-expected NIMs, iii) asset quality staying benign, and iv) improved capital market conditions .

Forecasts We are revising down our FY16-17F NIM assumptions by 16bps pa to 2.20-2.24%. This is after we update our model for the full-year results, resulting in a downward evision in the “base”, ie we revise down FY15 NIM to reflect the actual NIM of 2.35% from the forecasted 2.45%. The balance 6bps downward revision is to reflect management’s more cautious outlook on NIMs above. We have also toned down our FY16-17F non-interest income expectations ahead by 25% pa. The above is partly cushioned by donward revisions in FY16-17F overheads by 7-9%, as earlier upfront costs incurred for business efficiency should start to filter through. We also assumed credit cost of 0bps/5bps for FY16F/FY17F as we think recoveries should continue to remain healthy. Overall, we have cut our FY16-17 net profit projections by around 13-14% pa. We now project FY16 net profit growth of 4% (underlying basis), driven by stronger nn-interest income and cost management initiatives filtering thr ough. We introduce our FY18F numbers in this report.

Valuations and recommendation We reduce our GGM-derived TP to MYR5.70 from MYR6.85. The revision takes into account the changes to our earnings projections above and a revised sustainable OE assumption of 11.5% in our GGM assumption (previously 13%). Our other GGM assumptions are: i) COE of 10.7%, and ii) 4.5% long-term growth. Consequently, our 2015 fair P/BV falls to 1.13x from 1.37x. Our fair P/BV is below the stock’s 10-year average P/BV of 1.5x. We think this is fair as our FY16-18F ROEs of 11.2-11.3% are below the 10-year median ROE of 12% and, more importantly, are significantly below the 13-14% ROEs AMMB enjoyed in the past five years.

Overall, AMMB’s move to reposition its portfolio towards better risk-grade customers and reduce the loan mix from auto financing should be a positive for asset quality in he mid- and longer-term. In the near term, however, this would mean sub-par loan growth and relatively steeper NIM compression compared to peers, leading to lacklustre bottomlin growth. Asset quality could be another area of concern among investors in the near term given the spike in impaired loans reported in 3QFY15, coupled with the falling loan loss coverage level that now stands at 105% vs 127% a year ago. Finally, we expect the revised guidance on FY16 KPIs to lead to earnings and ROE downgrades from consensus (lower ROE expectations will have an impact on GGM-derived target prices). Hence, we downgrade our recommendation to SELLfrom Neutral.