AMBANK's 1HFY25 net profits (+18% YoY) and dividends were within expectations. Its focused approach to loans growth may not narrow the market share gap with its peers but would enable sustainable margins going forward. Regarding margins, efforts to tighten liabilities have already reflected softer funding costs. We thus raised our FY26F earnings by 10% mostly on the back of better NIMs, which supports a higher ROE trajectory to increase our GGM-derived PBV TP to RM6.40 (from RM5.85). The group's adoption of FIRB which widens dividend prospects on the back of higher 50% payout ratio (from 45%) could bring AMBANK to above average yields. Maintain OUTPERFORM.

1HFY25 met expectations. AMBANK's 1HFY25 net earnings of RM1b made up 53% each of both our full-year forecast and consensus full- year estimates. An interim dividend of 10.3 sen (at 34% pay-out) is also deemed within expectations, against our anticipated FY24 payment of 24.0 sen (at 40% pay-out).

YoY, 1HFY25 total income grew by 5% with NII (+8%) being supported by NIMs expansion (+14 bps) amid a modest loans growth of 3% (YTD: +0.3%) from more selective onboarding. NOII saw a decline from wholesale banking units but saw most of its fee-based income streams gained traction, namely wealth management, insurance and business banking, which are typically recurring in nature.

CIR remained stable at 44.6% as opex growth of 5% grew in pace with top line, mostly due to higher personnel cost. Credit cost charges eased to 20 bps (-14 bps) with better recoveries seen during the period and gradual writeback of overlays to RM519m (from RM541m in 1QFY25).

This translated to a 1HFY25 net profit of RM1b (+18%).

QoQ, 2QFY25 posted total income growth of 6% thanks to stronger NII (+17%) led by NIMs (+7 bps, thanks to funding costs coming off) was offset by higher credit cost of 29 bps (+18 bps) absent writebacks seen in the prior quarter, resulting in flattish net earnings.

Highlights. In line with its focus-minded 5-year strategy, loans growth will not be an indicator of AMBANK's prospects (FY24 targeted at 3%- 6%) as it prioritises higher value and quality accounts which require more structured offerings.

We also observed in this earnings report that the group had so far beat industry trends by suppressing its funding cost thanks to liability management initiatives to support NIMs growth. AMBANK's deposits strategy would skew to more affluent retailers for funds while cutting back on wholesale business deposits which tend to be costlier to sustain. While the group is expecting 4QCY seasonally higher deposits competition to influence its margins, current strides could suggest that they will not be too widely affected given their wider margin spread.

No changes to headline targets were made.

Post-migration to FIRB Approach, AMBANK's CET-1 was pulled to 15.3% with 1QFY25's seeing 183 bps uplift (from 13.2%). With this higher capital base, we believe the group would take a more generous stance on dividends, paying up to 50% (from 45%). This level sufficiently retains the group's CET-1 ratio (2QFY25: 15.3%) to provide the group a comfortable balance for further capital management. This adjustment prompted us to raise our dividend expectations for FY25F/FY26F to 29.0 sen/32.0 sen (from 24.0sen/25.0sen) with a more attractive yield of 5.3%/5.8%.

Forecast. While we tweak our FY25F earnings by 2% from housekeeping on its loans and deposits book, we raised our FY26F earnings by 10% on more resilient NIMs expected from AMBANK from 2.00% to 2.07%. This led to FY26F ROE to hover at 10.4%, which is on the path to meet its 11%-12% ROE target in FY29.

Maintain OUTPERFORM with a higher TP of RM6.40 (from RM5.85). We apply our strengthened ROE trajectory for AMBANK of 10% into our GGM model (from 9.5%) with a COE input of 9.9% and TG of 3.0%. This translates to a higher applied CY25F PBV of 1.02x (from 0.94x).

We believe a 10% ROE for AMBANK could be realisable in the long-term as it progressively builds a larger portfolio of SME accounts supported by the rebalancing into cheaper funding sources along the way. While our applied dividend payout remains modest, assuming the group is to immediately reflect an aspired payout of 55%, prospective dividend yields of 6%-7% would make them the top payer as of the date of this report.

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.

Management Guidance

Source: Kenanga Research - 28 Nov 2024