AMMB is disposing its non-performing loans to Aiqon Capital for RM554m. This is positive news as we estimate FY19 earnings could potentially be bumped up by some 30%; however, it is non-recurring in nature. That said, we see an indirect positive spillover to its net interest margins as these fresh funds could come in handy, considering its high loan-to-ratio of c.99%. For now, forecasts are left unchanged. Maintain HOLD and GGM-TP of RM4.70, based on 0.79x CY19 P/B.

NEWSBREAK

Disposing NPLs worth RM554m. AMMB has entered into a related party transaction to dispose RM554m non-performing loans (NPLs) to the special purpose vehicles of Aiqon Capital. It consists of 537,068 accounts, comprising both consumer and business NPLs. Note these were already fully written off from the books of AMMB. The disposal amount is within the valuation range of RM450m-RM750m as appraised by KPMG Corporate Advisory. That said, it could still be adjusted downwards to account for NPLs that have low balance, mutually agreed, fully settled and where hire purchase vehicles were repossessed. The disposal is expected to complete by 31 March 2019.

HLIB’s VIEW

A positive development. Although it is one-off in nature, this is a positive news. Assuming the full amount of RM554m can be recovered, our FY19 earnings forecast could be bumped up by some 30%. The fresh money could help to ease the need to compete for expensive funding and thus, defend net interest margins (NIM). Note that AMMB’s loan-to-deposit ratio (LDR) is at c.99%, the highest among peers under our coverage (system LDR is c.88%). We estimate every 10bp improvement in its NIM could raise our FY20-21 earnings forecasts by c.7%.

Forecast. Unchanged for Now.

Retain HOLD and GGM-TP of RM4.70, based on 0.79x CY19 P/B with assumptions of 7.7% ROE, 9.0% COE and 3.0% LTG. This is below its 5-year mean of 1.01x and the sector’s 1.12x. The discounts are fair on the back of its lower ROE generation, which is 2-3ppt under its 5-year and industry averages. Risk-reward profile of the stock is balanced. Key positives are improving cost-to-income ratio and steady asset quality trend. However, we are still concerned of a potential upward normalisation of its net credit cost in the medium- and longer-term coupled with its high LDR of c.99%.

Source: Hong Leong Investment Bank Research - 4 Jan 2019