AMMB HOLDINGS BHD

By UOB Kay Hian Malaysia Research Hold (maintained)

Target price: RM4.26

KEY issues which led to the significant fall in AMMB Holdings Bhd’s (AmBank Group) financial performance in the third quarter of financial year 2018 (Q3’18) are expected to partially normalise in Q4FY18 and FY19.

This includes a provision recovery amounting to RM50mi in a single lumpy corporate loan provision in Q3’18, and the staff cost which is anticipated to trend at a more normalised rate.

AmBank Group’s Q3’18 earnings went down by 37.5% year-on-year (y-o-y), primarily on the back of sharp reversal in net credit cost to 32 basis points in Q3’18 as a result of lower recoveries and RM50mil in individual allowance pertaining to a single corporate loans default.

Apart from that, the lower earnings were also due to elevated operating cost pressure, which saw operating expenditure rising 11.4% y-o-y, mainly attributed to a 8.5% y-o-y rise in staff cost.

UOB Kay Hian Malaysia Research said that the expected reversal in the lumpy RM50mil provisions in Q4’18 will likely be offset by a RM120mil one-off staff mutual separation scheme (MSS) that was recently completed.

On FY19 pre-provision operating growth, the research house projects the growth to be largely offset by sharply lower recoveries.

“Despite a relatively robust pre-provision operating growth forecast of 17.7% for FY19, we are expecting bottom line to remain relatively flattish in FY19 as we expect group net credit cost to double to 12 basis points in FY19 from an extremely low FY18 base of 6 basis points.

“This is likely to cap FY19 return on equity at a relatively subdued 7.1% which is significantly below the sector average of 10.3%.

“A stronger revenue growth assumption of 6.4% for FY19, well-contained staff cost growth of 3%-4% and RM80mil per annum staff cost savings from the MSS are key drivers to our relatively robust 17.7% y-o-y pre-provision operating growth forecast for FY19,” it said in a note.