AMMB’s 2QFY20 earnings dipped 18% QoQ, as it posted loan loss allowances instead of writebacks while its associates & JVs incurred losses. Also, lending growth slowed and asset quality regressed. However, sequential NIM improved. Overall, results were largely in line with expectations but we raised our payout assumption by 2ppt to reflect stronger than-expected DPS. In our view, its risk reward profile remains balanced as there are still no compelling catalysts to re rate the stock. Retain HOLD and GGM-TP of RM4.25, based on 0.67x CY20 P/B.

Largely in line. AMMB’s 2QFY20 earnings fell -18% QoQ and -8% YoY to RM320m and in turn, brought 1HFY20 net profit to RM711m (+2% YoY). This was largely in line with expectations, making up 49-54% of our and consensus full-year forecasts.

Dividend. A 1st interim DPS of 6sen (+20% YoY) was declared. Ex-date: 13 Dec-19. This beat expectations as we only forecasted DPS of 5sen.

QoQ. Bottom-line declined 18%, no thanks to loan loss provision of RM105m (vs net writebacks of RM45m) and losses incurred by associates & JVs (-RM8m vs RM13m). Otherwise, pre-provision profit was up 5% on positive Jaws; net interest margin (NIM) widened 4bp to 1.91%.

YoY. Despite posting positive Jaws from faster total revenue growth of 4ppt vs opex, net profit fell 8%; this came on the back of bad loan allowances (tripled) and losses incurred by associates & JVs (-RM8m vs RM7m).

YTD. Higher provision for bad loans (doubled), lower income from associates & JVs (- 80%), and impairment booked on financial investment (RM40m vs 1HFY19: RM2m), capped earnings from growing faster (+2%).

Other key trends. Loans growth slowed to 2.0% YoY (1QFY20: +2.5%) due to large corporate repayment and deposits expansion tapered to 1.9% YoY (1QFY20: +4.3%), given deliberate release of expensive funding. Still, loan-to-deposit ratio (LDR) stood stubbornly high at 99% (+1ppt sequentially). As for asset quality, gross impaired loans (GIL) ratio climbed 11bp QoQ to 1.77%, no thanks mainly to its residential mortgage, trading, manufacturing, and construction segments.

Outlook. While NIM is seen to widen further over the next 3-6 months from downward deposit repricing and cut in SRR ratio, slippage is likely to return after that, given little room to optimize LDR and stiff price-based competition for loans. However, we see lending growth to pick some pace from its current slow acceleration, but it won’t be substantial, observing a slower domestic macro climate. As for net credit cost, we expect it to normalize upwards as recoveries have been thinning over the years and sizeable NPLs have been sold.

Forecast. We keep our FY20-22 earnings forecast but raise the corresponding DPS estimates by 5% (implying payout of 45-48% from 43-46%).

Keep HOLD and GGM-TP of RM4.25, based on 0.67x CY20 P/B with assumptions of 7.2% ROE, 9.2% COE and 3.0% LTG. This is below its 5-year mean of 0.84x and the sector’s 1.00x. The discounts are warranted given its weak ROE output, which is 2ppt and 3ppt beneath both its 5-year and industry average respectively. All in all, its risk reward profile remains balanced, since there are no compelling catalysts to re-rate the stock, despite being inexpensive.

Source: Hong Leong Investment Bank Research - 2 Dec 2019