We upgrade our call on AMMB to BUY from Neutral, with an unchanged MYR8.00  FV.  The  group  has  maintained  discipline  amid  continued pricing  pressure  on  both  loans  and  deposits,  which  we  believe  has helped the group sustain above-industry NIMs without having to resort to  liquidity  management.  We  also  like  AMMB’s  healthy  CASA  growth and strategies to grow recurring non-interest income.

• Focus  on  profitable  segments  and  risk-based  pricing.  In  our  view, AMMB’s  use  of  risk-based  pricing  as  well  as  staying  disciplined  on pricing is  aptly  captured  in Figures 1 and 2.  The group  has managed to sustain  an  average  spread  of  24bps  over  the  sector  in  terms  of  net interest  margin  (NIM)  for  the  past  five  years.  This  is  all  the  more impressive  considering  that  its  loan-to-deposit  ratio  (LDR)  only  rose 310bps  to  97.1%  over  this  period,  whereas  the  sector  LDR  was  up 650bps to 88.1%. We believe  that  efforts to grow low cost deposits also helped. AMMB’s current account and savings account (CASA) ratio was 20.9% at end-FY14 vs 12.2% at end-FY10.
• The acquisitions of  Kurnia,  MBf Cards contributed  positively,  lifting the  non-interest income contribution to 32% in FY14 from 29% in FY13. AMMB  incurred  MYR75m  in  total  acquisition  and  business  efficiency expenses over the past two FY in relation to these acquisitions, but such expenses  should  taper  off  going  forward,  with  a  remaining  MYR20m-30m estimated to be incurred for FY15. On the other hand,  we expect cost and revenue synergies  to start  contributing more meaningfully,  with an annual run rate of MYR100m kicking in from FY15.
• High CA to buffer  potential asset quality issues.  As we mentioned in our  sector  report,  we  believe  investors  are  still  keeping  an  eye  out  for potential  asset  quality  issues.  We  believe  AMMB  is  well-positioned  to weather  the  storm  given  its  high  collective  allowance  (CA).  Its  CA  to loans  of  2.2%  is  the  highest  among  peers ,  while  its  overall  loan  loss coverage of 127% is also among the highest.
• Investment case. No change to our earnings forecasts for now, with our GGM-based  FV  staying  at  MYR8.00  (COE:  9.8%;  ROE:  13.5%;  longterm  growth:  4.5%).  The  stock’s  share  price  performance  has  been relatively  subdued,  but  this  means  that  valuations  are  now  more palatable. Hence, we upgrade our recommendation to BUY from Neutral.

Source: RHB