AMMB sees better 2Q, but not enough

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AMMB Holdings Bhd
(Nov 20, RM6.58)
Maintain hold with target price of RM6.72:
AMMB Holdings’ net profit for the second quarter ended September of financial year 2015 (2QFY15) of RM445.8 million (-17.1% quarter-on-quarter [q-o-q]; +1.1% year-on-year [y-o-y]) took core net profit  (excluding RM208 million profit from the sale of its life insurance arms to MetLife in 1QFY15 and RM76 million merger-related cost with the bulk recorded in 1QFY15) to RM851.1 million (-5.7% y-o-y) for the first half (1H) of FY15, accounting for only 43.4% of Hong Leong Investment Bank (HLIB) and 47.4% of consensus, below expectations.

AMMB had a contraction in its loan growth (more cautious stance), sharp contractions in net interest margin (especially in 1Q with 60% of the drop attributed to the life insurance deal and one-offs), and continued weak non-interest income. Despite a stronger performance in 2Q, it was still not sufficient to offset the weak 1Q and meet our earlier expectations. AMMB declared an interim dividend of 12 sen (against 7.2 sen in 2QFY14). Despite the higher dividend, it is not changing its policy of 40% to 50% but rather altered the payment proportion from one-third and two-thirds to 50% (of expected full year payout) for 1H and 2H, respectively.

The stronger 2Q is attributed to lower overheads (although it expects 2H to be similar to 1H from regulatory and core system costs) and lower provision (as a result of its efforts to only accept high quality loans, especially hire purchase [HP] and commercial property loans). Loan growth will track behind the industry average due to the ongoing rebalancing of HP and commercial property loans.

Lower FY15 key performance indicators (KPIs) include: (i) profit after tax and minority interests (Patami) growth of 8% against 10%; (ii) return on equity (ROE) of 14%  against 14.2% to 14.5%; and (iii) loan growth if 3%  against 9% and FY16/FY17 KPIs (Patami growth 6% to 10% against 9% to 11%; ROE of 14% against 14.5% to 15.5%). The only positive change was to lower FY15 credit cost to 15 basis points (bps) against 30bps.

AMMB is comfortable with its capital position and working on an internal ratings-based (IRB) approach which would normally result in more efficient capital requirement but with implementation in three years’ time.  We maintain “hold” with target price cut to RM6.72 (RM7.77 previously) based on the Gordon Growth Model (ROE of 12.8% and weighted average cost of capital of 10.9%) post earnings forecasts downgrade. — HLIB Research, Nov 20

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This article first appeared in The Edge Financial Daily, on November 21, 2014.