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AMMB Holdings Bhd
(May 25, RM6.34)
Maintain neutral with higher target price of RM7.10 from RM7 previously.
AMMB’s fourth quarter ended March (4QFY15) net profit of RM519.2 million led to a cumulative net profit for FY15 of RM1.92 billion.

The higher cumulative net profit was contributed mainly by the one-off divestment gain of shares in AmLife and AmFamily Takaful and AmFraser Securities.

Gross divestment gain for AmLife and AmFamily Takaful was RM462 million while that for AmFraser Securities was RM14 million.

Stripping out the one-off divestment gains, cumulative net profit for FY15 was RM1.63 billion, a drop of 2.9% year-on-year (y-o-y).  Core earnings accounted for 98.4% of our estimates for FY15 earnings and were within our expectation.

Gross loan growth was subdued at 1.6% y-o-y due to derisking of its auto loan book and rebalancing of its loan portfolio towards higher quality assets.

Growth in its auto loan book continued to trend downwards to 10.9% y-o-y.

Growth in credit card lending and personal loans also decelerated to 15.3% y-o-y and 6.5% y-o-y respectively.

The group is more comfortable in granting mortgage loans as seen from the growth in its mortgage loan book by 6.2% y-o-y in FY15. Overall, retail loan growth was slower at 5.1% y-o-y in FY15.

Excluding auto finance loans, retail banking loan growth was flat at 1.5% y-o-y. For retail banking, the focus continues to be on small business banking and young professionals.

Meanwhile, its wholesale banking loans grew 2.2% y-o-y as loans were impacted by loan repayments despite stronger growth in the mid corporations or commercial loans.

Net interest margin (NIM) continued to be under pressure due to the rebalancing of its loan portfolio towards higher quality credits.

On a quarterly basis, reported NIM in 4QFY15 slipped five basis points (bps) to 2.33%.

Comparing its NIM for the full FY15 to normalised NIM in FY14, the contraction was 13.6bps. This was contributed by competitive pressure on lending rates and change in the mixture of assets, rebalancing of auto financing towards higher quality loans, higher yields from Treasury markets and general insurance business and more favourable funding impact from deposits.

Higher cost of funds ahead will continue to impact the group’s NIM. This is due to continued intense competition for retail and wholesale deposits. Pressure on deposit rates is starting to been seen again for the industry in April 2015.

This is despite the recent Bank Negara Malaysia  guidelines to ease regulations on liquidity coverage ratio (LCR) which we had been earlier expected to ease some pressure on banks’ funding cost.

For FY16 ending March 2016, management has guided a NIM contraction of 15bps to 20bps.

Core customer deposits slowed down to a growth of 2.8% y-o-y while growth in current account, savings account (Casa) was flat at 0.1% y-o-y. We understand that the Group will focus on small business banking to tap on Casa.

For FY15, Casa ratio remained stable at 20.3%. With its slower loan growth, liquidity has improved with a lower net loan-to-deposit ratio (LDR) unadjusted of 93.5%. On an adjusted basis, LDR was lower at 83.8%.

With a net write-back of loan impairment, the group recorded a credit cost of -0.04% in FY15 versus 0.08% in FY14. Overall gross impaired loan (GIL) ratio was 1.79% in FY15 compared with 1.86% in FY14.

The group recorded impairment for a large and well-secured loan in the real estate sector in 3QFY15 which resulted in the GIL ratio for impaired real estate loans rising to 4.7% in 3Q.

In 4QFY15, there were no further impairments for the loans extended to the sector and GIL for impaired real estate loans remained stable at 4.6%.

Meanwhile, the GIL ratio of the impaired loans for the other sectors continued to be stable. Excluding the impairment of the abovementioned large loan in the real estate sector, GIL ratio of the group and that of its wholesale banking will be lower at 1.42% and 0.77% respectively.

The group’s loan life coverage (LLC) stayed above 100% at 104.9% and was above the domestic industry’s 98.7%. Excluding the impaired real estate loan, LLC ratio will be higher at 131.9%. By segments, impairment loan ratio for wholesale banking loans rose to 1.55% due to the aforesaid large impaired real estate loan while that for retail banking improved to 2%.

Management hinted that recovery is expected on the impaired real estate Loan. For FY16, management has given a guidance of 20bps for loan loss charge.

The Group has completed Phase 1 of the core banking system and works are in progress to complete Phase 2 by end-2015.

We revise our net profit estimate for FY16 downwards by 3% to RM1.69 billion by adjusting our estimates for Islamic banking income and factoring in a higher NIM contraction, lower loan growth assumption as well as tweaking our estimates for loan loss charge. — MIDF Amanah Research, May 25

AMMB_FD_26may15

This article first appeared in The Edge Financial Daily, on May 26, 2015.

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