Review

AMMB’s 1HFY17 results came within our expectations but slightly above consensus. Registering YTD net profit of RM675.6mn, the results accounted for 48% and 54% of ours and consensus full year estimates.

The group reported another quarter of sequential improvement, with results showing positive tractions in the management of asset quality, growing targeted revenue lines such as cards and merchants, wealth management and DCM. Compared to 1QFY17, net profit accelerated by 9.2% - anchored by a combination of an improvement in non-interest income (non-NII) (+32.3% QoQ) - due to higher trading and investment income, coupled with lower overhead expenses (-2.1% QoQ).

Nevertheless, the subdued operating environment led to weaker YoY results. Compared to 1HFY16, operating income decreased by 6.4% YoY. Declines in net interest income (NII) and contribution from Islamic banking operations were cushioned by an 18.3% YoY increase in non-NII. While prudent expense management had helped yield YTD savings of some RM62mn, expenses could increase to build digital capability and increase talents in the SME segments. The cost-to-income (CTI) ratio stood at 55.6%, higher than a year ago. Despite proactive cost management efforts as well as emphasis on cost discipline, we believe the CTI ratio could remain elevated due to slowing income growth.

The decline in NII reflects further margin compression. NIM dipped by another 2 bps QoQ (-19 bps YoY) due to lower NIM from corporate loans, lowering of the OPR in July and decline in auto mix in its retail books. On a positive note, management noted improved margins from CA and Cash Management. This is in tandem with AMMB’s target to increase CASA penetration via: 1) accelerating payroll acquisition, and 2) enhance cash management solutions.

Total loans broadened by marginal 0.6% YoY. YTD, total loans decreased by 0.7%. This was led by a 9% decline in corporate banking loans due to some major repayments and subdued business outlook. Slower auto sales also contributed to a 5% decline in auto financing. Healthy growth was observed in mortgage loans (+10.0% YTD) while trade loans climbed on the back of higher utilization. Management noted that momentum is building in the SME segment.

Registering an increase of 18% YoY, non-NII strengthened thanks to increases in wholesale banking’s profit owing to higher loan underwriting fees and commission on trade facilities coupled with trading gains from fixed income and stronger fixed income trading. From the insurance division, insurance income climbed on the back of an improvement in the historical claims experience as well as investment income. On the flip side, fund management and brokerage income slipped by 5% YoY. According to management, broking fee declined on lower turnover.

Driven by recoveries, the net credit cost strengthened to -17 bps from -12 bps a year ago. Lower individual and collective allowances were also reported, giving boost to asset quality. Excluding recoveries however, credit cost climbed to 52 bps from 32 bps in 1H16. The gross impaired loans ratio (GIL) strengthened to 1.64% from 1.94% in 4QFY16. Improvement in the GIL ratio was broad based as both the retail and wholesale segments reported lower GIL of 1.5% and 1.8% respectively. Loans loss coverage ratio stood at 83.5%, an increase from 81.2% in the previous quarter.

Lastly, proforma FY16 CET1 and Total Capital Ratio were healthy at 11.9% and 16.5%. An interim dividend of 5.0 sen (1HFY16: 5.0 sen) representing a payout of c. 36% was proposed.

Impact

No change to our earnings estimates.

Outlook

We maintain our profit growth assumptions of 7.5/9.0/8.9% for FY17/18/19 on the back of the group’s strategic growth plans. We believe that competition, slacking demand and ongoing efforts to reposition the loan portfolio (which is resulting in weak loans growth and possibly sharper-than-expected NIM compression) could continue to underpin the group’s weak earnings growth prospects.

On a positive note, efforts to grow the mass affluent, affluent and SME segments are showing signs of a pickup in momentum. Efforts to contain costs through emphasis on cost discipline and optimization of efficiency should help cushion earnings. Meanwhile, proactive account monitoring and collection has helped spur recoveries. In managing its asset quality, AMMB has also gradually been reducing its exposure to O&G and commercial property segments.

Valuation

TP is maintained at RM4.50. This translates to FY17 PBV of 0.84x. AMMB is currently trading at FY16 PBV of 0.81x, a discount to industry’s average PBV of 1.15x. HOLD maintained.

Key upside/downside to TP include: 1) strong pickup in capital market activities, 2) unexpected increase in unemployment rate resulting in high default rates among retail borrowers, 3) cost pressure resulting in further NIM compression, 4) better-than-expected contribution from insurance division, FX, Derivative and Wealth Management units, 5) diverse income flow due to AMMB’s corporate transformation strategies and from tie-up with MetLife, and 6) potential M&A takeover target or exit of ANZ.

Source: TA Research - 22 Nov 2016