Topline Driven Growth BUY. Last Traded: RM4.19

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1 C O M P A N Y U P D A T E Wednesday, March 14, 2018 FBMKLCI: 1, Sector: Finance THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* AMMB Holdings Berhad TP: RM4.70 (+12.2%) Topline Driven Growth Last Traded: RM4.19 BUY Li Hsia Wong Tel: liwong@ta.com.my Topline growth gains traction To recap, 9MFY18 net income grew 5.4% YoY. Making up 74% of our full year forecast, the increase in net income was mostly driven by net interest income (NII) due to rising loan growth momentum and more stable net interest margin (NIM) for AMMB. Coming from a low base, loans and advances have gradually been rising with the rate of increase surpassing the system s loans growth for the past 3 consecutive quarters. Targeting areas such as card (+18% YTD), retail SME (+76% YTD), business banking (+20% YTD) and mortgages (+15% YTD), we believe AMMB is poised to tap on a pickup in business loans as well as mortgages, which we estimate would increase by some 7-8% in With that, we maintain our assumption that loan growth will quicken at a healthier pace of 5.5/7.5/7.5% in FY18/19/20 (FY17: +3.5%). Figure 1: Loans growth (YoY Chg) Share Information Bloomberg Code AMM MK Stock Code 1015 Listing Main Market Share Cap (mn) Market Cap (RMmn) wk Hi/Lo (RM) 5.70/ mth Avg Daily Vol ('000 shrs) Estimated Free Float (%) 42.0 Beta 1.4 Major Shareholders (%) ANZ Funds EPF Forecast Revision FY18 FY19 Forecast Revision (%) - - Net profit (RMmn) Consensus TA's / Consensus (%) Financial Indicators FY18 FY19 ROE (%) ROA (%) CTI Ratio (%) Gross Impaired Loans Ratio ( Allowance Coverage (%) BV/ Share (RM) Price/ BV (x) Source: Company, BNM, TA Research Non-NII supported by growth in targeted segments Predicting healthier 8% YoY increase in fee income, we foresee growth to be underpinned by rising wealth sales (3QFY18: +22.1% YoY), merchant volumes (3QFY18: +6.1% YoY) and credit cards in the retail banking division. Meanwhile, we believe the robust demand for capital market activities should help buoy AMMB s wholesale banking activities. Commanding market shares of some 14-15%, AMMB is currently ranked third in the DCM (overall MYR bonds) and Islamic Sukuk market. Share Performance (%) Price Change AMMB FBM KLCI 1 mth mth (6.1) mth (5.0) mth (11.0) 7.1 (12-Mth) Share Price relative to the FBMKLCI Better asset quality envisaged Excluding recoveries, credit cost climbed to 53 bps in 9MFY18 from 47 bps in the previous year attributed to some RM114.6mn increase in individual allowances. During the quarter, we note several lumpy charges in the wholesale, business and retail books. On a positive note, we understand that RM50mn provided in the wholesale banking book would be written back by the 4Q of FY18. Plans to dispose of 1-2 corporate NPLs in FY19 could help Source: Bloomberg Page 1 of 5

2 strengthen AMMB s portfolio. For now, we factor in gross credit charge assumptions of 52 to 56 bps for FY18/19/20. We note that overall credit charges will be driven higher by tapering of recoveries. 14-Mar-18 NIM compression possible due to competition Potentially moderating future NII is the possible compression in net interest margin (NIM) due to competition. Supported mostly by effective corporate treasury activities, AMMB reported YoY margin expansion of 2 bps in 9MFY18. However, we observe that as the bank increases its focus in loan segments that are also driven by intense competition, we foresee potential pressures on NIM as assets could get repriced lower. Additionally, we note that the 15% YoY increase in AMMB s deposits were mostly due to increases in retail and nonretail FDs. With combined FD growth of close to 18%, vs. total CASA growth only 0.8% (vs. industry: +7% YoY increase), we foresee risk of some NIM compression. Figure 2: FD growth (YoY Chg) Source: Company, BNM, TA Research Figure 3: NIM Source: Companies, TA Research Forecasts maintained To recap, AMMB reported stronger 9MFY18 topline growth but YTD net profit of RM878.7mn came below expectations. Slipping 11.1% YoY, the decline was largely due to higher-than-expected provisions as credit charge continue to normalise along with a lumpy charge from a corporate account, which we expect AMMB to reverse in the upcoming 4QFY18 results. In our results review, we maintained topline growth forecast but fine-tuned our assumptions Page 2 of 5

3 on provisions. Normalising at a faster pace than expected, we had reduced our assumption on recoveries. Taken together, we estimate FY18/19/20 net profit of RM1,148/1,337/1,487mn. 14-Mar-18 Potential downside risks to earnings assumptions In our view, the broader market environment remains challenging. In addition to rising credit costs (due to MFRS9) and tapering of recoveries for AMMB, we envisage competition to intensify - not just from the local peers but foreign banks as well. Higher-than-expected operating expenses on the back of rising regulatory costs and digital transformation efforts could depress bottomline. Imputing RM128mn in one-off cost expected in 4Q from the recent MSS exercise, we forecast CTI (cost-to-income) ratio of 59%, slightly above management s guidance of <58% for FY18. Furthermore, we foresee NIM facing pressure as pricier FD deposits outpace CASA and loans growth. Valuation and recommendation Taken together, our ROE assumption of 7% is in tandem with management s revised FY18 ROE guidance to 7% (from 10% previously). We project ROE to improve to 7.8% and 8.2% in FY19 and FY20. With that, we maintain AMMB s TP at RM4.70. Backed by attractive FY18 PBV of 0.7x, we reiterate our BUY recommendation on AMMB. Based on the current share price and assume a payout ratio of around 40%, AMMB s dividend yields stands at c. 4.4%. Figure 4: 10-year PBV cycle (x) +1 SD: 1.6x Mean: 1.3x -1 SD: 1.0x Source: Company, Bloomberg, TA Research Key upside/downside to TP include: 1) strong pickup in capital market activities, 2) potential lift in capital from the sale of assets and corporate NPLs, 3) stress among retail borrowers giving rise to HP defaults, 4) higher COF and competitive pressures resulting in inability to sustain YoY NIM expansion, 5) better-than-expected contribution from insurance division, FX, Derivative and Wealth Management units, and 6) potential M&A takeover target or exit of ANZ. We note that foreign shareholding level (excluding ANZ s 23.8%) has been on a decline. Page 3 of 5

4 14-Mar-18 Figure 5: Foreign shareholding level (%) Source: Company, TA Research Financial Summary (RMmn) Income Statement Key Financial Ratios and Margins FYE 31 Mar (RMm) E 2019E 2020E FYE 31 Mar (RMm) E 2019E 2020E Interest income 4, , , , ,837.4 Return and efficiency Interest expense (2,459.5) (2,432.0) (2,523.9) (2,709.2) (2,919.2) ROE (%) 8.8% 8.5% 7.0% 7.8% 8.2% Net interest income 1, , , , ,918.2 ROA (%) 1.0% 1.0% 1.1% 0.9% 1.0% Islamic banking income Net interest margin (%) 1.3% 1.3% 1.3% 1.3% 1.3% Total non-interest income 1, , , , ,750.6 Fee-based/total income (%) 14.2% 15.0% 15.3% 15.3% 15.3% Total income 3, , , , ,601.0 Non-interest/total income (%) 33.8% 36.4% 37.2% 37.6% 38.0% Overhead expenses (2,174.3) (2,160.5) (2,378.3) (2,365.3) (2,508.6) Cost-to-income (%) 62.4% 61.2% 59.2% 53.8% 52.6% Operating profit 1, , , , ,092.4 Loan loss provisioning (65.7) (146.6) (165.4) Balance sheet Associates contributions Loans growth (%) 0.1% 3.5% 5.5% 7.5% 7.5% Profit before tax 1, , , , ,963.7 Gross NPL ratio (%) 1.9% 1.9% 1.9% 1.9% 1.9% Taxation (331.5) (392.4) (308.3) (355.4) (392.7) Loan loss reserves (%) 81.1% 66.3% 82.3% 81.8% 81.6% Minority interests (97.3) (84.2) (84.2) (84.2) (84.2) Deposit growth (%) -1.9% 4.1% 5.0% 6.0% 6.0% Net profit 1, , , , ,486.8 LD ratio (%) 95.7% 95.5% 95.6% 97.0% 98.3% CET1 ratio (%) 11.6% 11.9% 11.3% 11.1% 10.5% Balance Sheet Total capital ratio (%) 16.5% 16.7% 15.8% 15.3% 14.4% FYE 31 Mar (RMm) E 2019E 2020E Cash and short-term fund 11, , , , ,971.1 Investment statistics Deposit with FIs 1, , , , ,234.8 PER (x) Marketable securities 22, , , , ,433.1 EPS (sen) Total current assets 35, , , , ,638.9 EPS growth rate (%) -32.1% 1.7% -13.3% 16.4% 11.2% Net loans and advances 86, , , , ,165.4 BV per share (RM) Fixed assets P/BV (x) Intangible assets 3, , , , ,444.0 DPS (sen) Other long-term assets 7, , , , ,259.4 Dividend yield (%) Total assets 133, , , , ,779.3 Customer deposits 90, , , , ,012.4 Deposits from other FIs 1, , , , ,658.2 Repurchase securities Bills and acceptances Borrowings 8, , , , ,841.4 Bonds 4, , , , ,174.1 Other liabilities 12, , , , ,043.4 Total liabilities 117, , , , ,729.5 Shareholders' funds 16, , , , ,049.8 Page 4 of 5

5 14-Mar-18 (THIS PAGE IS INT ENTIONALLY LEFT BLANK) (THIS PAGE IS INTENTIONALLY LEFT BLANK) Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Wednesday, March 14, 2018, the analyst, Wong Li Hsia, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee Kuala Lumpur Malaysia Tel: Fax: Page 5 of 5