AMMB - Potential higher dividend payout

Greater opportunities in non-interest income, driven by: a) improvement in equity trading volume – a boost to brokerage income, b) removal of 30% bumiputera requirement in initial public offerings (IPO), which will boost IPO demand, and c) higher advisory fees following the easing in regulations for debt and capital raising exercises.

Lower default risk, but greater impact in FY11. Although management maintains its net non-performing loans guidance of 4% for FY10, default risk is now lower with the improved economic outlook and return of employment opportunities.

Better HP margin. The recent hike in hire purchase (HP) rates is definitely a positive for AMMB given its 40% exposure to auto loans. With the adjusted HP rates, AMMB can now focus on growing this business segment.

Potential higher dividend payout from active capital management. For FY10, we expect DPS of 10 sen, based on a 35% payout, higher than FY09’s 8 sen. With its excess capital, AMMB could declare even better dividends. A dividend policy may be announced after this financial year, with a payout likely to be in the range of 40-50%.

We lift our FY10 net profit forecast slightly by 4.8% from RM845m to RM885.4m to factor in the slightly improvement in loans growth of 5% (previously 3%).

Upgrade to HOLD with fair price of RM4.05. Our fair price is derived from the Gordon Growth Model (ROE: 13%, payout ratio: 40% (previously 35%) and required return: 10%). This implies a forward P/B of 1.23x, in line with its historical average P/B valuation. AMMB is our top mid-cap pick as it offers the cheapest valuation with potential earnings upside from the strengthening capital market and improved HP margins.