We are upgrading our call to NEUTRAL on valuation grounds, with the same MYR5.70 TP (1% downside). In response to recent media reports, AMMB said it was not aware of any investigations by the regulator on the group itself. It is still business as usual and the recent reports have not resulted in any unusual deposit outflows. Macroeconomic conditions remain challenging, but are largely in line with expectations.

Not aware of any investigations. AMMB held a teleconference yesterday to clarify on recent media reports involving the group. Management said that it was not aware of any investigations carried outby the regulator on the group itself or any broader impact (eg licensing issues). AMMB added that it is still business as usual and the reports have not resulted in any unusual deposit outflows.

Operating environment still challenging. This is on the back of factors such as slowing economic growth, weaker consumer sentiment post the impleme ntation of the goods and services tax (GST), and corporates taking a wait-and-see stance due to the uncertain environment. AMMB believes the reaction has been more pronounced for higher leveragedhouseholds post-GST. Due to the tough environment, AMMB remains vigilant on asset quality, but highlighted that industry numbers appear to be holding up. On the deposit front, management still sees the usual seasonal deposit campaigns taking place but thinks competition has stabilised since the liquidity coverage ratio (LCR) requirements came into effect last month. On the whole, AMMB said the challenging environment is largely within expectationsand the group’s operations are tracking its KPIs.

Search for new CEO still ongoing. AMMB is in the process of narrowing down the list of suitable candidates for the CEO position.

Not aware of any stake sale plans by ANZ. Finally, management said that it was not aware of any plans underway by ANZ to dispose of its stake in AMMB.

Forecasts and investment case. No changes to our earnings forecasts. We retain our GGM-based TP of MYR5.70. We expect AMMB’s ongoing rebalancing of its loan portfolio to keep bottomline growth relatively lacklustre in the near term, but this should be a positive for asset quality in the mid and longer term. Following the recent share price correction, AMMB currently trades at FY16F P/E and P/BV of 10.4x and 1.13x respectively. Valuations appear fair at current levels, in our view. Hence, we upgrade our recommendation to NEUTRAL from Sell.

Conference call highlights AMMB held a teleconference yesterday, during which its CFO, Mandy Simpson, discussed recent news reports relating to the group. We set out the key takeaways from the call and Q&A session below.

Not aware of any investigations. Management said that it was not aware of any investigations carried out by the regulator on the group itself or any broader impact (eg licensing issues). AMMB added that it is still business as usual and the reports have not resulted in any unusual deposit outflows.

Operating environment still challenging. This is on the back of factors such as slowing economic growth, weaker consumer sentiment post-GST, and corporates taking a wait-and-see stance due to the uncertain environment. AMMB believes the reaction has been more pronounced for higher leveraged-households post-GST. Due to the tough environment, AMMB remains vigilant on asset quality, but highlighted that industry numbers appear to be holding up. On the deposit front, management still sees the usual seasonal deposit campaigns taking place, but thinks competition has stabilised since the LCR requirements came into effect last month. On the whole, AMMB said the challenging environment is largely within expectations and the group’s operations are tracking its KPIs.

Search for new CEO still ongoing. AMMB is in the process of narrowing down the list of suitable candidates for the CEO position. Not aware of any stake sale plans by ANZ. Finally, management said that it wasnot aware of any plans underway by ANZ to dispose of its stake in AMMB.

Risks The risks include: i) weaker-than-expected loan growth, ii) sharper-than-expected net interest margin (NIM) compression, iii) deterioration in asset quality, and iv) capital market conditions staying soft.

Forecasts We make no changes to our earnings forecasts. The 13% YoY drop in FY16F net profit is mainly in the absence of lumpy gains AMMB enjoyed last year from the disposal of its stakes in its life insurance units and AmFraser (total gains of MYR476m). Excluding the lumpy income and expense items last FY, we project FY16 net profit to rise 4% YoY, driven by stronger non-interest income and cost management initiatives filtering through.

Valuations and recommendation We retain our GGM-derived TP of MYR5.70. Our GGM assumptions include: i) a sustainable ROE of 11.5%, ii) COE of 10.7%, and iii) 4.5% long-term growth, resulting in a fair P/BV of 1.13x. Our ascribed P/BV multiple 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, 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 the mid and longer term. In the near term, however, this would mean subpar loan growth and relatively steeper NIM compression compared to its peers, leading to lacklustre bottomline growth.

That said, following the recent share price correction, the stock currently trades at FY16F P/E and P/BV of 10.4x and 1.13x respectively. As valuations appear fair at current levels, we upgrade our recommendation to NEUTRAL from Sell.