Review

• AMMB reported a mixed bag of results. YoY, 3Q17 results grew 4.3% to RM313.2mn but fell sequentially on the back of lower non-interest income (non-NII) and increase in allowances. Nevertheless, 9M17 results came within expectations. Registering YTD net profit of RM988.8mn, the results accounted for 71% and 79% of ours and consensus full year estimates.

• The subdued operating environment led to weaker YoY results. Compared to 9MFY16, total income decreased by 1.2% YoY. Declines in net interest income (NII) and contribution from Islamic banking operations were cushioned by a 4% and 6.3% YoY increase in non-NII and the insurance business.

• The decline in NII reflects further margin compression. NII from retail and wholesale saw YoY contractions. NIM had fallen by some 6 bps YTD. Nevertheless, efforts to manage margins from raising CASA balances and enhance the Cash Management business resulted in 5.5 bps increase in NIM QoQ. Sequential improvement in NIM was also observed from efforts to rebalance the portfolio along with asset repricing in the wholesale and retail businesses.

• Total gross loans gained momentum to accelerate at a stronger pace of 3% YTD. The increase was led by higher utilization in trade loans (+13% YTD), increase penetration into the SME segment due to strategic tie-ups (+11% YTD) and the mortgage book (+15% YTD). We also note increases in the IB and cards business. Auto loans remained lackluster, falling by -7% YTD on the back of prolonged auto sales. We also note a 5% decline in the corporate banking loans due to some major repayments and subdued business outlook.

• Registering an increase of 9% YoY, non-NII strengthened thanks to a trading gain from fixed income syndication and stronger contributions from the insurance business due to improved historical claims experience. Fee income also climbed on the back of higher loan underwriting fees and commission on trade facilities. Areas which dampened non-NII include the 12% YoY contraction in fund management and brokerage income due to lower Bursa turnover, as well as lower forex income due to depreciation of the MYR vis-à-vis the USD, thus resulting in MTM revaluation loss.

• The cost-to-income (CTI) ratio stood at 57.2%, 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 lackluster growth in the topline coupled with efforts to transform its digital platform - from channels, processes, productivity to analytics. We also foresee higher costs in terms of risk and compliance.

• Driven by recoveries, the net credit cost strengthened to -23 bps from -19 bps a year ago. Excluding recoveries, credit cost climbed to 47 bps from 37 bps in 9MFY16. Lower individual allowances were reported, giving some boost to asset quality. The gross impaired loans ratio (GIL) strengthened to 1.54% from 1.81% in 3QFY16. Improvement in the GIL ratio was broad based as both the retail and wholesale segments reported lower GIL of 1.4% and 1.6% respectively. Loans loss coverage ratio stood at 84.1%, a slight uptick from 83.5% in the previous quarter. Going forward, management remains concern in the O&G and non-residential property sectors. As AMMB proactively monitor its accounts, collection activities on long outstanding historical loans are ramped up.
   
• Lastly, proforma FY17 CET1 and Total Capital Ratio were healthy at 11.6% and 16.1%.

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 ongoing focus on targeting negative expense growth through cost management, stronger growth momentum from the targeted SME segment and sound asset quality. However, we believe that competition, slacking demand and ongoing efforts to reposition the loan portfolio (which is resulting in weak loans growth and sharper-thanexpected NIM compression) could continue to underpin the group’s weak earnings growth prospects.

Valuation

• Rolling valuations forward to FY18, we raise AMMB’s TP to RM5.00 from RM4.50. This translates to FY17 PBV of 0.93x. AMMB is currently trading at FY17 PBV of 0.85x, 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 - 27 Feb 2017