AMMB Holdings - Marred by Further Provisions

Date: 
2024-02-27
Firm: 
KENANGA
Stock: 
Price Target: 
4.80
Price Call: 
BUY
Last Price: 
4.24
Upside/Downside: 
+0.56 (13.21%)

AMBANK’s 9MFY24 results missed expectations due to lumpy overlays on its remaining repayment assistance books. It will emphasise on building a better-margined book. It reiterated its guidance for RM400m net profit per quarter. We cut our FY24-25F earnings forecasts by 9-6%, but maintain our TP of RM4.80 and OUTPERFORM call.

9MFY24 missed expectations. AMBANK’s 9MFY24 core net profit of RM1.05b came in at only 66% of our full-year forecast and 62% of consensus full-year estimates. This had accounted for one-off provisions on intangibles (RM112m), restructuring expenses (RM80m) and lumpy tax credits (RM538m). The surprise to us was an overlay charge of RM328m attributed to AMBANK’s outstanding repayment assistance accounts which are due by 4QFY24. No dividends were declared as the group typically announces bi-annual payments.

YoY, 9MFY24 total income was flattish, dragged by: (i) net interest income declining (-6%) despite a 4% loans growth following softening NIMs (1.83%, -29 bps) on higher funding cost; but offset by (ii) stronger fees from investment banking services and trading gains. Cost-income ratio rose to 44.6% (+2.3ppt) mainly due to higher personnel costs. On the flipside, credit cost surged to 76bps (+40bps) as the group frontloaded overlays of RM328m in consideration of its stage 2 and 3 repayment assistance accounts, which amount to RM1.2b outstanding. This results in full loan loss coverage for the group’s retail segment.

In addition to this, the group had also incurred RM112m software impairment and RM80m provisions for operational restructuring. The group had also reflected a RM538m write-back in relation to tax overprovisions made during FY21’s RM2.83b Global Settlement payment. All in, this led 9MFY24’s reported earnings to RM1.37b (+6%). However, adjusting these one-off items would translate to a core net profit of RM1.05b (-18%) instead.

QoQ, 3QFY24 total income improved by 6% mainly on some of the reasons mentioned above albeit with loans growth only coming in at 0.4%. Reported earnings of RM543m in 3QFY24 would reflect a 16% growth thanks to the lumpy tax credit but adjusting for one-off items, core net profit would come in at only RM120m (-75%).

Briefing’s highlights. The group still appears confident with its nearterm deliveries, maintaining a reported earnings guidance of RM400m/quarter.

1. NIM compression is likely to have ended with the group aiming for stable QoQ reporting. We opined that 4QCY23’s year-end seasonality could have suppressed chances for a margin rebound as fixed deposit rates likely stayed competitive.

2. Additionally, AMBANK are staying away from matching the attractive deposit rates offered by digital banks for now in favour of retaining margins.

3. Targeted lending could be the most adopted strategy going forward as the group attempts to secure higher margin portfolios to sustain earnings. The SME segment still appear supportive in line with growth expectations while larger corporate accounts may benefit from the roll-out of large infrastructure projects. That said, its CY24 loans growth project of 4% may reflect some softening in the nearterm.

4. The group’s decision to frontload overlays of RM328m is pegged on possibly diminished disposable income on its remaining repayment assistance accounts which are due for expiry in the coming period. Out of its existing RM1.7b books (c.1% of total loans), only RM500m are Stage 1 and the debtors are expected to clear their dues accordingly where as the remaining RM1.2b are Stage 2 and 3.

Forecasts. Post results, we cut our FY24F earnings by 9% mainly in consideration of the higher provisions towards the group’s repayment assistance. Meanwhile we also tone down our FY25F earnings by 6% as we adjust for a possibly slower pick up in margins due to a tighter margins trajectory.

Maintain OUTPERFORM and TP of RM4.80. Our TP is based on a GGM-derived CY24F PBV of 0.80x (COE: 10.2%, TG: 4.25%, ROE: 9.0%). We continue to believe our thesis that AMBANK is still in a better shape for consolidation. On top of securing sustainable ROEs of c.9% (since FY19 of <9%), the group may now be in a better position to deliver better dividend payouts of c.40% (from 35%) which we are anticipating. The group is also one of the leaders in terms of SME profile, which is touted as a high-growth segment that could accelerate market share growth for the group should we anticipate better economic prospects in the medium-term. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 27 Feb 2024

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