AMMB started its financial year on a strong note as 1QFY20 core earnings rose 72% QoQ; this was thanks to better NOII, widening of NIM, strict cost discipline, coupled with the absence of lumpy salary bonus provision. However, lending growth tapered and asset quality weakened a little. Despite results being in line, we still decided to trim our FY20-21 earnings forecasts by 3% to account for softer NIM and loans growth outlook. Also, we introduce FY22 estimates. All in all, its risk-reward profile remains balanced as there are still no compelling catalysts to re-rate the stock. Retain HOLD but cut our GGM-TP to RM4.25 (from RM4.45), based on 0.67x CY20 P/B.

In line. AMMB’s 1QFY20 core net profit grew 72% QoQ (+13% YoY) to RM392m, after adjusting for one off-items (mainly the NPL disposal gain) in 4QFY19. This met expectations, making up 28-29% of our and consensus full-year forecasts. Recall, 1QFY19 formed 27% of FY19’s earnings.

Dividend. None proposed as AMMB only divvy in 2Q and 4Q of its financial year.

QoQ. Core earnings jumped 72%, thanks to positive Jaws as total revenue increased 10% while opex fell 12%. The strong top-line was due to better non-interest income (NOII, +21%) as its insurance business (+52%), fee (+8%), and investment (+10%) performances were robust. Also, net interest margin (NIM) widened 9bp to 1.87%. As for opex, the decline was due to strict cost discipline along with the absence of lumpy salary bonus provision.

YoY. Again, positive Jaws and a higher net writebacks for impaired loans (+4-fold) led to the 13% rise in net profit. Pre-provision profit was up 8% as total income expanded 5% given higher investment gains (+41-fold) vs opex growing 3% on the back of higher personnel cost (+6%) due to change in accounting accruals for bonus provision to avoid negative lumpiness like in 4QFY19.

Other key trends. Loans growth slowed to 2.5% YoY (4QFY19: +2.5%) due to large corporate repayment and we saw the rise in deposits tapered to 4.3% YoY (4QFY19: +11.8%) on the back of deliberate release of expensive funding. Still, loan-to-deposit ratio (LDR) stood stubbornly high at 98% (+3ppt sequentially). As for asset quality, gross impaired loans (GIL) ratio increased to 1.66% (+7bp QoQ), no thanks mainly to its residential mortgage, auto, manufacturing, and construction segments.

Outlook. We see NIM slippage returning in subsequent quarters given little room to optimize LDR, full 9 months impact from May-19’s OPR cut, and growing price-based competition for loans. Although we expect lending growth to pick some pace from its current slow acceleration, it won’t be material, observing a slower domestic macro environment. Besides, we see net credit cost normalising up since recoveries have been thinning over the years and sizeable NPLs have been sold.

Forecast. Despite 1QFY20 results being in line with expectations, we still decided to trim our FY20-21 earnings forecasts by 3% to account for softer NIM and loans growth outlook. Also, we introduce FY22 estimates.

Retain HOLD but with a lower GGM-TP of RM4.25 (from RM4.45), following our earnings cut and based on 0.67x CY20 P/B (from 0.69x) with assumptions of 7.2% ROE (from 7.3%), 9.2% COE and 3.0% LTG. This is below its 5-year average of 0.88x and the sector’s 1.04x. The discounts are fair on the back of its lower ROE, which is 2ppt and 3ppt beneath both its 5-year and industry mean respectively.

Source: Hong Leong Investment Bank Research - 23 Aug 2019