The flat QoQ earnings in 3QFY19 were largely in line; lumpy recoveries offset the negative Jaws created by weak NOII. That said, the pace of loans growth continued to be above industry average and asset quality improved. However, NIM contraction is expected to stay and NCC is seen to gradually normalise upwards. All in, we raise our FY19-21 net profit forecasts by 2-6% as we were too aggressive with our NCC assumptions before this. For now, there are still no compelling catalysts to re-rate the stock. Maintain HOLD with a higher GGM TP of RM4.90 (from RM4.70), based on 0.82x CY19 P/B.

Largely in line. AMMB posted flattish QoQ net profit growth in 3QFY19 (+60% YoY), bringing 9MFY19 bottom-line to RM1.0b (+19% YoY). This was largely in line, coming in at the higher end of our forecasts by forming 80% of our full-year estimates (due to lumpy recoveries) while making up 74% of consensus.

Dividend. None declared as AMMB typically does not divvy during its 3Q.

QoQ. Earnings came in flat as lumpy recoveries from 3 large business non-performing loan (NPL) accounts erased the negative Jaws created mainly by weak non-interest income (NOII, -19%). The lower NOII was no thanks to mark-to-market (MTM) losses. Besides, we observed sequential net interest margin (NIM) slippage of 3bp to 1.88%.

YoY. Lower overhead expenses (-11%) and lumpy recoveries were drivers that helped catapult net profit by 60%. Similar to QoQ, results could have been better if not for the poor NOII (due to MTM losses and also, shrink in fee-related income).

YTD. The 19% bottom-line expansion was given: (i) higher total revenue (+1%) as both net interest and Islamic banking income grew 3-5% respectively, backed by loans growth of 6%, (ii) better cost containment with opex dropping 10%, and (iii) lumpy recoveries. However, these positives were capped by the NOII decline of 5%.

Other key trends. Loans continued to increase at a robust pace of 6% YoY, fuelled by the retail mortgage and business banking segments. These were accompanied by deposits growth, which accelerated 7% YoY. Yet, loan-to-deposit ratio (LDR) was still stubbornly high at 94%. As for asset quality, it improved with gross impaired loans (GIL) ratio trended downwards to 1.62% (-10bp QoQ).

Outlook. Similar to peers, NIM compression is expected to persist on its inflexibility to optimize LDR. Also, the un-abating competition for retail fixed deposits would further exert pressure on NIM. In FY19-21, we incorporated a reduction of 1-2bp. As for loans growth, we expect the momentum to sustain at 5-6% over the next 2 years, as it gain market share over rivals in the retail mortgage space. Despite improving asset quality trend, we see net credit cost (NCC) normalising upwards considering recoveries have been thinning over the years coupled with the recent move to dispose RM554m worth of NPL. We have assumed FY20-21 NCC of 4-5bp in our financial model.

Forecast. We revise up our FY19-21 net profit forecasts by 2-6% to reflect lower NCC of 4-5bp from 8-9bp; we were overly aggressive with our assumptions before this.

Maintain HOLD but with a higher GGM-TP of RM4.90 (from RM4.70), based on 0.82x CY19 P/B (from 0.79x) with assumptions of 7.9% ROE (from 7.7%), 9.0% COE and 3.0% LTG. This is below its 5-year mean of 1.01x and the sector’s 1.17x. The discounts are fair on the back of its lower ROE generation, which is 2-3ppt under its 5- year and industry averages.

Source: Hong Leong Investment Bank Research - 22 Feb 2019