AMMB Holdings - 1QFY10: Set to outperform

AMMB Holdings (AMMB) reported a record profit of RM258.2m for 1QFY10. This is above our expectation. The variance is due mainly to stronger-than-expected contributions from the investment banking (IB) divisions.
Management still cautious, but talking about potential upside. Despite the strong 1QFY09 results (annualised net profit of RM1b), management is sticking to its profit guidance of RM800m-900m for FY10. Management is waiting for more convincing economic indicators behind the recent improvement. However, economic activities and the job market are likely to to pick up, we expect management guidance to be revised up by the 2QFY10 results briefing.

Non-interest income still the key upside. Performance in 1QFY10 is likely to continue. This is in line with management’s expectation based on deals in the pipeline. We are likely to see higher income generated from the following: a) brokerage income on higher trading value, b) initial public offerings, and c) higher advisory fees from debt and capital raising exercises.

NPL up, but still below expectation. Despite the uptick in non-performing loans (NPL) of RM95m qoq, NPL is below management expectation. Net NPL ratio inched down from 2.6% as at FY09 to 2.4%. Although we are still sticking to gross NPL expectation of 4.3%, this could be lower with the improvement in the economy and the job market. There could be potential upside to AMMB on lower credit charges.

We lift our FY10 and FY11 net profit forecasts by an average of 11% to an EPS of 32.3 sen and 37.0 sen respectively. We have factored in higher contributions from IB and Islamic banking (mainly from Islamic bonds issuance). We also factor in higher loan growth for FY10 from 5% to 7% considering the recent pick-up in property sales and potentially better demand for auto loans.

We upgrade AMMB from HOLD to BUY with a target price of RM5.10 (previously RM4.05) based on 1.58x P/BV (1 standard deviation from P/BV since FY06, i.e. talks with ANZ start). At RM5.10, AMMB is valued at 1-year forward PE of 13.9x (1 standard deviation from FY06 PE). We are valuing AMMB higher than its fair value based on Gordon Growth Model (fair at 1.23x BV or RM4.05) given its rising earnings growth and strong market liquidity.

AMMB is our top mid-cap pick as it offers undemanding valuation with rising earnings growth momentum. Greater impact from ANZ is likely to kick in in FY11 onwards with better market conditions and AMMB would be ready to be more aggressive with its strong capital base (Tier-1: 9.4%, risk-weighted capital ratio: 14.7%).