Horizon.my

Last week since 13/11/08 we saw a kick off in the quarterly reporting season for Malaysia’s banking majors:

• AMMB Holdings (AMMB)
• Hong Leong Bank (HLBANK)
• Malayan Banking (MAYBANK)
• Bumiputra-Commerce (COMMERZ)

Overall AMMB and HLBANK threw in pretty good results, while MAYBANK and COMMERZ not so good. After digesting some of the Press Releases and Analyst Reports, I’m summarizing my take of it on this blog. First, let’s look at AMMB:

AMMB HOLDINGS BHD
Second Quarter Net Profit for Jul-Sep 2008 came in at RM230 million, bringing the Half-Year Net Profit to RM433 million. AMMB is on track to reach a full year Net Profit of around RM850 million as previously foreshadowed by its management. This means it is trading at a current PE Ratio of 7.2x.

The Jul-Sep 2008 quarter was a record performance for the group, powered by loan growth and lower bad debt provisions. AMMB’s gross loans grew by 8.5% overall yoy driven mainly by its Business Banking division. On a net basis it grew by 11.8% to RM55.3 billion which makes AMMB the fifth largest lender in Malaysia and just a stone’s throw from RHBCAP. AmBank’s Business Banking team is headed by Dato James Lim (ex-Hong Leong Bank MD) and includes several other ex-HLB key performers. The current results is a great affirmation for this team.

The strong performance was partially offset by a trading loss of RM84 million and one-off loss of RM68 million from some sort of hedge accounting transaction. This was absorbed in the “Non-interest Income” line.

Notably, Operating Expenses increased by around RM108 million during the current half as compared to pcp. This has put a dent in AMMB’s cost-income ratio. It will be a while before it can reach its 40% target

Overall these negatives should not be a cause for too much concern for now. AMMB is doing what it said it wanted to do. It is well-positioned to weather the current downturn and also capitalize on market opportunities.

What about the Global Financial Meltdown?
In its Press Release, AMMB management said:
“Amidst deteriorating global and domestic economic conditions, operating landscape will become tougher over the next year or two. In order to achieve its medium term aspirations, the Group will de-risk and diversify businesses for dynamic growth.”

AMMB remains optimistic in achieving its medium-term outcomes, barring major negative economic impacts lasting deeper and longer. AMMB is presently enhancing its risk infrastructure and will be implementing more rigorous risk-based pricing models and scorecards in its key lending sectors. AMMB will continue to target high growth in deposits and new business ventures such as the operations of Islamic insurance, and foreign exchange and derivatives.

What is Management’s Guidance?
Previously AMMB was aiming for ROE of 20% and Cost-Income Ratio of 40% by FY2011. The targets have been postponed by a year to FY2012.

If we extrapolate from this, we are looking at possible Net Profit of around RM1.2 to 1.4 billion by FY2012.

What are the Analysts saying?
CIMB Research has AMMB Net Profit at RM829 million for FY2009 and strangely enough, going down to RM705 million in FY2010. The FY2010 forecast is pessimistic (perhaps due to loan contraction and higher bad loans). As a side comment, AmResearch has just published it’s take on COMMERZ  results and were negative on them. Wonder if this has any bearing?

RHB Research puts AMMB’s Net Profit at RM898 million, RM946 million and RM1,025 million for FY2009, FY 2010 and FY2011 respectively. RHB presents a more consistent scenario compared with management’s guidance.

HONG LEONG BANK BHD
Hong Leong Bank result looks good on its face, headline Net Profit of RM242 million for its First Quarter Jul-Sep 2008.

But look into the notes (Note 18) and you’ll find that the result is boosted by a “Foreign Exchange Gain” of RM41.8 million. This is lumped into the “Other Operating Income” line.

I could not find anything in the Press Release explaining this item.

Disclosure in its Press Release remains vague and minimal. “Everything is fantastic” was the story by management.

What Are Analysts Saying?
RHB Research has HLBANK’s Net Profit at RM815 million for the coming year, building up to RM911 million in 2011. CIMB Research has its at RM841 million building up to RM959 million for the same period.

How Does it Stack Up?
HLBANK’s Deposit Growth must be the envy of the industry. Deposits grew to RM64 billion – 26% higher than compared with pcp. This bank sucks in a lot of deposits and lends out relatively little.

HLBANK and AMMB is a most interesting comparison. They are probably each other’s key competitor. HLBANK’S market cap is around RM8 billion compared to AMMB’s market cap of RM6 billion. HLBANK share price has taken a lesser beating in recent times compared to AMMB. Like Public Bank (PBBANK), HLB is perceived to be lower risk because of its loan portfolio composition and stringent credit control.

38% of Hong Leong’s RM36 billion loan book was in Residential Mortgages (its largest exposure). This contrasts with 40% of AmBank loan book in vehicle loans. Residential mortgages are a lot safer of course.

Unlike AMMB, HLBANK takes a minimalist approach in its reporting.

You can see for yourself and download the Press Releases here:

AMMB Press Release FY2009 Q2
HLBANK Press Release FY2009 Q1

Even the Analysts have less to write about HLB. In both its Annual Report and Press Release, HLB is rather vague on its operating strategies but notwithstanding this has successfully projected itself as a “lower risk” bank. This has helped to maintain its share price while everyone else takes a huge beating.

Basically AMMB has a much bigger loan franchise but HLBANK continues to attract deposits. AMMB has a larger Interest Income base, Non-Interest Income Base and Islamic Banking base. It has a leading position in Investment Banking. AMMB is very clear on what it wants to do and it is Malaysia-focused. HLBANK competes in external markets and will have its fair share of external distractions. Going forward I believe HLBANK earnings momentum will slow compared to AMMB. Its loan growth outlook is not fantastic.

Hence HLBANK share price premium is not justified.

AMMB’s share price peaked at RM4.92 last year. At yesterday’s close of RM2.27 it is down 54% from its peak. Comparatively speaking at RM5.10, HLBANK share price is only down 27%  from its peak of RM7.00 last year. AMMB retains more of its earnings and has a lower dividend payout ratio. If you can take a little volatility and are looking to ride a recovery, AMMB would be a better bet.

Disclosure: The author holds shares in AMMB.