AMMB is embarking on a new 5-year strategy, “Winning Together – WT29.” The primary focus will be on achieving growth and enhancing returns by capitalising on its existing ecosystem of customers and partners to offer higher-value products and services. As competition within the industry intensifies, AMMB intends to increase its wallet share from its existing customer base. Rather than simply expanding market share, we understand that the objective is to achieve better asset yields.

Furthermore, AMMB aims to differentiate itself by strategically deploying digital technologies to improve operational efficiency. AMMB’s digitalisation efforts are expected to lead to the acquisition of stickier CASA, lowering the cost of funds, and driving cross-selling synergies to generate higher revenue per customer. We believe the transition towards digitalisation, underscored by the use of AI (Artificial intelligence), ML (Machine Learning) and data analytics, signifies a step in the right direction to build a niche over its peers.

Highlights of AMMB’s Digital Strategy

Key components of the digital strategy include analytical AI, biometric AI, generative AI, robotic process automation, and tablet solutions to expedite customer onboarding. In lending, these technologies will enhance turnaround times, credit risk assessment, and customer experience. Additionally, AMMB plans to monetise its merchant ecosystems through a P2P lender and expand with other payment partners. The strategy includes building alternative sales channels to supplement the current agency model for funds and retail loans and developing an ecosystem for Banca partners by offering digital insurance products through bank channels. A traceability platform will be introduced to complement supply chain solutions. In compliance and regulatory technology (regtech), AMMB will implement Anti Money Laundering (AML) big database surveillance. Risk management technology (risktech) will be used for credit scoring, portfolio default prediction, and optimisation of capital allocation.

The vision is to become an intelligence-driven bank, with the first phase of the data management platform launching in July 2024, followed by a second phase focused on data monetisation. This initiative is expected to improve AML transaction monitoring by 33%, predict loan defaults with 85% accuracy, and enhance deposit retention.

Augmenting Focus in Retail, SME and Mid-corp

Management has acknowledged that each business line plays a crucial role in driving the ambitions for FY29. There is, however, a noted emphasis on reorienting and augmenting the focus on growth in the mass affluent and affluent segments, as well as in SME and Mid Corp. In the retail segment, management's strategy is to achieve a more efficient return on assets (ROA) of over 1%. Consequently, we believe there will likely be less emphasis on expanding the mortgage and HP markets. Instead, the focus will shift towards credit cards and personal financing, integrated with digital wealth and lifestyle propositions.

The emphasis on the retail SME segment is also critical to support AMMB's goal of building the net interest margin (NIM) to 2% by FY29. Management anticipates the retail segment will be a net funder for the group due to the stickier, less volatile, and cheaper nature of deposits compared to wholesale funds. The target is to increase the Retail SME funding mix from approximately 50% three years ago to 60% by FY29, which would help manage the cost of funds.

Operationally, AMMB plans to strengthen the SME segment by merging Enterprise Banking (EB) and Retail SME (RSME) to align underwriting standards for improved risk management, tap into the deposit base to enhance the loanto-deposit ratio (LDR) and reduce the segment's gross impaired loans (GIL) ratio. Management sees significant opportunities in the SME segment and intends to leverage technology to penetrate this large customer base. This segment is expected to drive AMMB's lending, where yields are typically higher and growth rapid, given the abundance of SMEs in the country. AMMB aims to increase its SME market share from the current 7.2% to approximately 9.1%.

IB to Play a Crucial Supportive Role

AMMB will focus on expanding its business banking by deepening its presence in key regions such as the Klang Valley, Penang, Southern, and East Malaysia. Additionally, AMMB aims to strengthen its one-stop centre for inbound Foreign Direct Investments (FDIs) from China and Korea. By leveraging its extensive base of SME companies, AMMB plans to explore further opportunities with its Investment Bank (IB) to provide a platform for ACE listings.

The IB segment will also play a crucial role in supporting the group's growth in the integrated wealth business by bridging retail and business banking gaps with its wealth propositions. Furthermore, IB origination will provide an uplift in performance. Management intends to increase the underwriting of debt and equity to achieve its goal of becoming a top 3 investment bank by 2029. Despite the competitive nature of this segment, IB is noted to be a high-value segment with an ROA exceeding 3%.

Supply Chain and Transitional Financing Focus for WB

Over the next five years, we anticipate more modest growth in Wholesale Banking (WB) due to heightened competition from other banks and the capital market. Nonetheless, AMMB’s WB strategy aims to acquire operating accounts with a focus on supply chain opportunities, leveraging the existing anchor clients. These plans are expected to open avenues for enhancing non-interest income (non-NII) by strengthening AMMB’s offerings in transaction banking, cash management, and payroll services. These enhancements can also contribute to better funding costs for wholesale deposits.

Other key drivers for WB will include providing transitional financing to support industries in their decarbonisation efforts and promoting a green value chain. Due to the increase in competition, both from other banks and the capital market, growth prospects for WB are expected to be more modest, with a projected PATMI growth of 4.7% compound annual growth rate (CAGR) for this segment, compared to 10.8% and 13.0% for Retail and Business Banking, respectively.

Key WT29 Targets

Management aims to achieve a CAGR of over 8% in both income and PATMI, targeting approximately RM7bn in income (up from RM4.6bn in FY24) and RM2.9bn in PATMI (up from RM1.9bn in FY24). This growth is expected to be driven by an increase in NIM from 1.79% in FY24 to over 2.0% in FY29, achieved through a gradual reduction in the cost of funds by steadily accumulating CASA and more robust loan growth in higher-yielding SME, midcorporate, and business banking sectors.

Despite these ambitious growth targets, management is confident in maintaining a CET1 ratio of around 13% (FY24: 12.8%) and thus gradually increasing the dividend payout ratio from 40% to approximately 50%-55% by FY29. This would translate to a DPS of around 45 sen per share, up from 22.6 sen in FY24.

Potential Downside Risk to Targets

The improvement in earnings will also rely on sustaining asset quality, given the shift towards riskier segments. Management anticipates maintaining net loss rates around 20-25 bps over the next five years and reducing the GIL ratio to below 1.6% (from 1.67% in FY24) through enhanced collection and recovery efforts.

Another potential downside risk to WT29 targets is increased spending on digitalisation. Management will set aside RM180-200mn per annum or an accumulated 5-year investment in all key areas, including digitalisation, totalling

RM900mn. Despite that, management is confident in reducing the cost-toincome (CTI) ratio to 40% from 44.2%, supported by stronger income growth and operational excellence as productivity and efficiencies improve through digitalisation initiatives.

We recognise that achieving a ROE of 12% by FY29 will depend on market rationality in the loans and deposit space, as well as the bank's ability to build skillsets and relationship managers to develop innovative products and maintain strong client relationships. Although the bank is taking on higher risk, we believe that increasing investment in technology is timely. This investment could enhance operational efficiency and potentially keep AMMB ahead of its peers due to its first-mover advantage in analytical AI, biometric AI, generative AI, and robotic process automation, though success will ultimately depend on customer adoption.

Valuation and Recommendation

We maintain our FY25/26/27 net profit forecast at RM1,802/1,954/2,137mn, for now. AMMB’s TP is maintained at RM4.60. Our valuation is based on an implied PBV of c. 0.74x based on the Gordon Growth Model. BUY reiterated on AMMB.

Source: TA Research - 21 Jun 2024