KUCHING: While AMMB Holdings Bhd’s (AMMB) financial year 2015 (FY15) results were mostly within expectations and some analysts have stated that the group can further improve asset quality by realigning loan portfolios.
In a press release on Bursa Malaysia, AMMB said that the group’s profit after tax for FY15 increased by 9.3 per cent from the previous year to reach RM2,044.6 million, underpinned by non-interest income and lower allowances.
FY15 results came within expectations for both the research arm of Maybank Investment Bank Bhd (Maybank IB Research) and the research arm of TA Securities Holdings Bhd (TA Research).
On the other hand, FY15 results beat the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Research) estimates by 12.9 per cent, as the fourth quarter of 2015 (4Q15) turned out to be a surprise on the back of recoveries in allowances and impairments, resulting in an overall credit recovery for FY15 versus a total credit cost of eight basis points (bps) in FY14.
According to AffinHwang Research, it saw room for asset quality improvement and potentially lower risk-weighted capital requirements given management’s portfolio rebalancing (reducing exposure to the auto-financing segment and re-prioritising exposure in the retail and wholesale banking divisions), de-risking policies and efforts to focus on the preferred customer segments.
“Hence, we believe that credit cost expectations in FY16 to 17 will be lower on a normalized basis at 20bps versus our previous forecasts of 39 to 41bps,” the research arm said.
AffinHwang Rsearch noted that these strategic moves (implemented since FY15) had, however, resulted in a mild contraction of 1.1 per cent in FY15’s loan growth and a 25bps year on year (y-o-y) compression in FY15 net interest margin (NIM) (which is also affected by an increase in funding costs).
Therefore, it expected FY16 loan growth to be a modest four to five per cent y-o-y, while NIM will also inevitably decline at an estimated 15 to 20bps per annum.
Despite a more diversified revenue stream, TA Research believed macro challenges along with ongoing efforts to reposition the loan portfolio (which has resulted in weak loans growth and sharp NIM compressions) will underpin the group’s weak earnings growth prospects in FY16.
“On a positive note, efforts to contain costs through emphasis on cost discipline and optimization of efficiency should help cushion earnings,” it said.
This would be reflected in better cost-to-income (CTI) ratio, which TA Research has predicted would improve to circa 40 per cent (from FY15: 44.6 per cent) by FY18.
The research arm noted management had guided that capital market activities would remain weak for the year while loans growth will continue to ease on the back of softer demand for property loans and overall weakness in consumer spending.
It further noted that AMMB expects modest profit after tax and non-controlling interests (PATMI) growth of three to five per cent for FY16.
TA Research also underlined that this will be underpinned by loans growth of circa four to five per cent but offset by NIM compressions of another 15 to 20 bps.
“Potential upsides could stem from efforts to optimize efficiency and improving asset quality trends as AMMB intensifies monitoring of portfolios and step up collection efforts,” it said.
As for Maybank IB Research, it noted that the negative surprise from AMMB was in the larger-than-expected NIM compression guidance and the research arm has now assumed a contraction of 14bps for FY16 versus 6bps earlier on.
The research arm’s loan growth forecast for FY16 is marginally raised to four per cent from three per cent.
All in, Maybank IB Research cut FY16/17 earnings by six per cent/eight per cent and expect FY16 core net profit to decline by 1.3 per cent y-o-y.
Correspondingly, the research arm’s target price was cut to RM6.10 from RM6.90 on a lower price-to-book value (P/BV) peg of 1.3-fold (1.5-fold previously), supported by a current year 2015 (CY15) return on equity (ROE) of 11.6 per cent.
Maybank IB Research noted that the yield of 4+ per cent provided some downside buffer but that aside, the outlook remained subdued and challenging for the group. It maintained ‘hold’ on AMMB.
TA Research also cut its FY16 and FY17 earnings estimates on the back of management’s modest growth guidance and targets.
Changes to the research arm’s key assumptions included lowering of loans growths by one to two per cent points to four to five per cent, reducing overall growth assumption for non-net interest income (NII) and cutting NIM assumptions by some 10 to 20 bps from earlier forecasts.
Taken together, it now forecasted FY16 and FY17 net profit estimates of RM1,662 million and RM1,879 million from RM1,804 million and RM1,979 million previously.
“We expect more robust earnings of RM2,185 million in FY18, premised on stronger loans growth of six per cent and stable NIM and credit charge of less than 20 bps,” it said.
TA Research thus maintained ‘sell’ on AMMB and reduced its target price to RM6.00 per share from RM6.80 per share on the back of reduced FY16 earnings. This translated to FY16 PBV of 1.16-fold.
“AMMB is currently trading at FY15 PBV of 1.3-fold, a slight discount to industry’s average PBV of 1.45-fold,” it added.
Meanwhile, as AffinHwang Research revised its earnings forecasts for FY16-17 by 11.3 per cent and 19.4 per cent based on its assumptions, the research arm’s 12-month target price was thus raised to RM6.20 per share (based on a CY16 P/B multiple target of 1.1-fold) from RM5.30 per share previously.
The research arm thus upgraded AMMB to a ‘hold’ rating from a ‘sell’ previously given our expectation for an improvement in its FY16-18 earnings outlook.