We retain our NEUTRAL call on AMMB with a revised MYR4.20 TP (8% downside). We think asset quality will increasingly be at the forefront of investors’ concerns ahead as we head into softer macro economicconditions. We think asset quality risk is higher for the corporate segment. AMMB has been focusing on this segment in recent years and the quality of its credit underwriting standards will be well tested ahead.

Watching out for asset quality issues ahead. We think asset quality will increasingly be at the forefront of investors’ concerns as we head into softer macroeconomic conditions. Post the Global Financial Crisis (GFC), AMMB’s loan growth of 6% (2009-2014) was below system loan growth of 11% due to its focus on the corporate segment and, more recently, efforts to de-risk the loan book. Generally, we believe asset quality risk is higher for corporate loans given the chunky nature of such loans, and we expect AMMB’s credit underwriting standards to be tested in the quarters ahead. Thus far, apart from some lumpy impaired loan cases from the corporate egment, gross impaired loans have continued to improve due to write-offs. That said, we note that coverage levels are currently significantly lower at 103%, as compared to 120% a year ago. This raises the risk of negative loan provisioning surprises in the event of a deterioration in asset quality.

Forecasts. We lowered our FY16F-18F operating income forecasts by up to 4% as we think markets-related income may not recover meaningfully anytime soon, given the softer macroeconomic conditions. We also raised our FY16F/FY17F/FY18F credit cost assumptions to 10bps/16bps/22bps from -1bp/5bps/10bps respectively, to factor in potential asset quality issues. Overall, we reduced our FY16F/FY17F/FY18F net profit projections by 8%/11%/13% respectively.

Investment case. We reduce our GGM-derived TP to MYR4.20 from MYR4.90. The revision takes into account the changes to our earnings projections above and a roll-forward in valuations to 2016. Our other GGM assumptions are: i) COE of 10.7%, ii) revised ROE assumption of 9.5% (from 10.5%), and iii) 4.5% long-term growth. Consequently, our 2016 fair P/BV falls to 0.81x from 0.98x. 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 9.2-9.5% 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. NEUTRAL call maintained.