AMMB finished the year on a low note as 4QFY19 core earnings fell 35% QoQ; this was dragged by negative Jaws as opex escalated while NIM slipped. Also, loans growth tapered slightly. However, we observed continuous improvement in asset quality. Overall, we lowered our FY20-21 forecasts by 3-5% to account for softer NOII and weaker NIM outlook. For now, the risk-reward profile remains balanced as there are still no compelling catalysts to re-rate the stock. Maintain HOLD but cut our GGM-TP to RM4.60 (from RM4.90), based on 0.74x CY19 P/B.

Below expectations. Excluding one off-items (mainly the NPL disposal gain), AMMB posted 4QFY19 bottom line of RM227m (-35% QoQ, -10% YoY), bringing FY19 core net profit to RM1,273m (+6%). This fell short of estimates, making up 88-92% of our and consensus full-year forecasts (due to softer-than-expected non-interest income).

Dividend. Proposed a final DPS of 15sen (+50% YoY), which brought full-year DPS to 20sen (+33% YoY).

QoQ. Core earnings fell -35%, no thanks to negative Jaws as opex jumped 17% while total revenue registered flattish growth. The higher opex was due to higher personnel (+27%) and marketing costs (+25%). Also, we saw net interest margin (NIM) slipped to 1.78% (-10bp). That said, a better non-interest income showing (NOII, +8%) helped to mitigate a larger bottom-line drop.

YoY. A higher effective tax rate of (+8ppt to a normalised 24%) led to the decline in core net profit (-10%). Results could have been better if not for NOII being a drag (- 26%); this was mainly owing to a weaker contribution from its insurance business (- 46%) and shrinkage in fee-related income (-11%).

YTD. The 6% core bottom-line growth was hoisted by better cost containment with opex falling 12%, whereby personnel and administrative expenses decreased by 10% and 41% respectively. However, these positives were capped by subdued investment performance (-25%), which then impeded NOII from thriving (-11%).

Other key trends. Loans growth slowed slightly to 5.7% YoY (3QFY19: +6.0%) but was ushered by a quicker 11.8% YoY rise in deposits (3QFY19: +7.0%). Still, loan-to deposit ratio (LDR) stood stubbornly high at 95% (+1ppt sequentially). That said, asset quality continued to improve as gross impaired loans (GIL) ratio fell to 1.59% (- 3bp QoQ).

Outlook. We believe AMMB would be less impacted from the recent OPR cut, as it is poised to benefit from the more significant downward repricing in costly deposit base. However, this does not dispel its inflexibility to optimize LDR and hence, NIM slippage is always in the cards. As for loans growth, we expect the momentum to sustain at 5- 6%, as it gains market share over rivals in the retail mortgage space. Nonetheless, we see net credit cost normalising up (despite better asset quality trend) since recoveries have been thinning over the years and more NPLs have been sold.

Forecast. We cut our FY20-21 earnings forecasts by 3-5% to account for softer NOII and weaker NIM outlook (following the recent OPR reduction).

Retain HOLD but with a lower GGM-TP of RM4.60 (from RM4.90), following our earnings cut and based on 0.74x CY19 P/B (from 0.82x) with assumptions of 7.4% ROE (from 7.9%), 9.0% COE and 3.0% LTG. This is below its 5-year average of 0.92x and the sector’s 1.14x. The discounts are fair on the back of its lower ROE, which is 3ppt beneath both its 5-year and industry mean.

Source: Hong Leong Investment Bank Research - 29 May 2019