Kenanga maintains OUTPERFORM call reflecting on past headlines concerning possible M&As involving AMBANK, the house opines that its current fundamental outlook and prevailing macro climate could present more palatable opportunity for both the Bank and prospective buyers.
AMBANK had been said to be in talks with several financial institutions (including RHBBANK and Grab) over the past few years. The failure thus far for any deal to materialise could be attributed to impasse regarding pricing, and changes in operating environment. However, considering the factors below, Kenanga opines that the prospects for talks of consolidation could now be brighter.
No thanks to Covid-19 restrictions in 2020, the banking sector was marred by moratoriums and repayment assistance programs used as counter measures against pains suffered during economic lockdowns. The result of which was a deterioration in asset quality and slowing economic activities. At present, the house believes a sense of confidence has been reinvigorated in this space, particularly as impairment needs have rationalised. While loan growth may see some challenges in line with GDP expectations, we opine its resilience has been proven.
The projected EPS growth of 7%/10% for AMBANK for FY24F/FY25F is reflective of such readings, with expected ROEs to linger close to 10% which were stronger than pre-Covid years. The group’s RM2.83b global settlement payment to the Ministry of Finance in 2021 is also expected to be a one-off item.
Spurred by the abovementioned, AMBANK saw its forward PB valuations drop to their lowest point at 0.55x in July 2021. The heightened uncertainties then even alluded that AMBANK would require a further discount for a deal to occur. With fundamental strengths established and past development under wraps, AMBANK had reverted to historical levels of 0.70x forward PBV before diminishing again but this time from a sectorwide de-rating owing to unfavourable developments in the global banking scene (refer to the overleaf for AMBANK’s forward PBV trends).’
Kenanga opines that for long-term recovery to continue, a 0.70x forward PBV valuation price tag would be a more acceptable price for stakeholders. A premium from this could also be applied for the group’s increasing presence in the fast-growing SME space. Arguably, AMBANK is also more fundamentally sound now with cost-income ratios staying below 50% (as compared to pre-Covid averages of 60%).
There are always concerns over social impact of banking sector consolidation, especially potential job losses. Kenanga believes such concern was particularly pronounced prior to the economy reopening and the latest general election. Now with a more stable job market post the pandemic and a new mandate given to a new government, it believes various stakeholders will be more open to the idea of banking consolidation that will ultimately bring long-term benefits to the economy.
The above discussion provides a more speculative angle for the stock. That said, the house also believes the group could do well fundamentally as a key beneficiary of the economic recovery from its notable SME loans profile (21%) with asset quality concerns in the household sector aside. The group also seeks to enjoy a better long-term growth trajectory from more aggressive partnerships against its peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.
