AMBANK (1015) - AMMB - Steady Pickup

AMBANK (1015) - AMMB - Steady Pickup

9MFY17 net profit of RM988.8m came in within expectations, making up 74.8% and 75.6% of our and consensus full-year estimates respectively. Earnings slipped 3.3% YoY owing to a 6.7% decline in net interest income amid competitive pressures, though partly mitigated by higher fee income from loans and trade financing. We are encouraged at the sight of its loan book expanding again however as it chugs along toward realizing its Top 4 aspirations. While we still see competitive challenges ahead given the crowded space it is headed toward, we remain positive on the Group’s medium-term prospects underpinned by its strategic initiatives. Management anticipates a stronger 10% for FY18, underpinned by stronger performances in its targeted segments (SME, corporate), negative expense growth and active margin management. Our Outperform call is retained, with target price raised to RM4.90 (RM4.72 previously) as we revert back to a dividend-discount based valuation to adequately reflect its growth prospects.

• After consecutive quarters of lackluster credit expansion, the Group has bounced back stronger this quarter with household-related loans continuing to provide the impetus, though supported by some business based loans (particularly in the SME sector) coming back to life. The mortgage segment (+21.6% YoY, +5.6% QoQ) was the mainstay, as loans to the finance, real estate and business (14.3% of total portfolio) registered growths of 39.3% YoY and 12.5% QoQ respectively.

• Net interest margin (NIM) picked up 10bps to 2.02% on a QoQ basis largely due to an easing in cost of funds during the quarter. Efforts to improve NIMs are anticipated to come from 1) progressively increasing contribution from higher-return segments like SME and trade financing, and 2) balancing deposit growth. While laudable, with some measure of early successes being seen, it is a competitive space which various other financial groups are similarly targeting in their own aspirations, hence the higher chances of significant successes not being met.

• Incidences of new non-performing loans have been on a downtrend since 4QFY16, an encouraging sight considering the prevailing environment throughout the period, especially in the oil and gas industry. No major surprises were seen in the current quarter, with exposure to the oil and gas sector still closely monitored and challenges under control with a higher 94% (2QFY17: 95%) internally assessed as moderate risk or better. 83% of real estate-related loans are assessed as moderate risks or better (2QFY17: 82%), providing some relief though. Loan loss coverage is at 83.5%, still below industry’s 90.2%.

Bouncing Back

After consecutive quarters of lackluster credit expansion, the Group has bounced back stronger this quarter with household-related loans continuing to provide the impetus, though supported by some business-based loans (particularly in the SME sector) coming back to life. The mortgage segment (+21.6% YoY, +5.6% QoQ) was the mainstay, as loans to the finance, real estate and business (14.3% of total portfolio) registered growths of 39.3% YoY and 12.5% QoQ respectively. Whilst still too early to tell if its new initiatives are gaining any traction as yet, these expansions are nonetheless a welcome sight, with some of its targeted segments seeing good growth. The challenge remains in balancing loans growth and net interest margins while maintaining prudent credit standards amid an increasingly competitive environment. A plus point, in our view, is that the Group’s de-risking of its balance sheet in recent years has put in on relatively stronger footing to restart on a clean slate, hence potential earnings upsides being more evident in the short term, at the very least.
Margins Likely To Remain Steady

Net interest margin (NIM) picked up 10bps to 2.02% on a QoQ basis largely due to an easing in cost of funds during the quarter. 6.5bps came asset re-pricing, the remaining 3.5bps from its liability management. Averaging 1.96% for 9MFY16, NIMs are anticipated to hold at current levels for the year as the Group continues on its targeted growth strategy toward achieving its Top 4 aspirations. Efforts to improve NIMs are anticipated to come from 1) progressively increasing contribution from higher-return segments like SME and trade financing, and 2) balancing deposit growth, amongst which would be to improve its unfavorable funding position whereby CASA penetration remains low. While laudable, with some measure of early successes being seen, it is a competitive space which various other financial groups are similarly targeting in their own medium-term aspirations, hence the higher chances of significant successes not being met.

Segmental Review

There was no let-up in the retail banking division’s weakness as 9MFY17 net profits declined 26.3% (1HFY17: -14.7%) with competitive pressures remaining evident. While the division’s loans base expanded 4% YTD, total deposits shrank 5% as the Group faced challenges in sustaining retail-based fixed deposits which inadvertently kept margins compressed as the industry’s hunt for deposits intensified. Of note, levels of gross impaired loans declined 14.1% YoY to RM686.8m on the back of higher recoveries and lower instances of new non performing loans.

Wholesale banking net profit grew 8.8 % YoY, underpinned by a strong 69.0% YoY growth contribution from its non-interest income segment (trading gain from sale of syndicated fixed income), mitigating a 3.5% YoY slippage in net interest income contributions owing to margin compressions. This is despite a decent 4.3% YoY growth in its loans portfolio, predominantly SME and trade finance-driven. Insurance-related contributions recorded a 26.3% YoY increase on lower claims experiences in the general insurance segment.

Asset Quality

Incidences of new non-performing loans have been on a downtrend since 4QFY16, an encouraging sight considering the prevailing environment throughout the period, especially in the oil and gas industry. No major surprises were seen in the current quarter, with exposure to the oil and gas sector still closely monitored and challenges under control with a higher 94% (2QFY17: 95%) internally assessed as moderate risk or better. Total exposure to the sector is about RM2.7bn. 83% of real estate-related loans are assessed as moderate risks or better (2QFY17: 82%), providing some relief though it should be noted that more than 50% of its current impaired loans are real-estate (34.0%) and residential property-based (23.0%). Loan loss coverage is at 83.5%, still below industry’s 90.2%.

AMBANK (1015) - AMMB - Steady Pickup

Source: PublicInvest Research - 27 Feb 2017

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