AMMB’s 3QFY20 earnings rose 9%, thanks to positive Jaws and lower effective tax rate but these were partially offset by bad loan provision during the quarter instead of a net writeback. Also, sequential NIM expanded, loans growth gained momentum, and asset quality improved. Overall, results were largely in line with estimate s but we cut FY21-FY22 profit by 2% to factor in higher NIM slippage. In our opinion, its risk-reward profile is still balanced as there are no compelling catalysts to re-rate the stock. Retain HOLD but with a lower GGM-TP of RM3.95 (from RM4.05), based on 0.64x CY20 P/B.

Largely in line. AMMB posted 3QFY20 earnings of RM382m (+20% QoQ, +9% YoY) and in turn, brought 9MFY20 net profit to RM1.1b (+5% YoY). This was largely in line with expectations, forming 76-83% of our and consensus full-year forecasts. Recall, 9MFY19 formed 82% of FY19’s earnings.

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

QoQ. Bottom-line increased 20%, thanks to: (i) lower loan loss provision (-36%), (ii) chalked in some non-financial recoveries, along with (iii) a smaller minority interest. Otherwise, pre-provision profit was down 1% on negative Jaws as opex jumped 5% vs total income growth of 2%. That said, net interest margin (NIM) widened 11bp.

YoY. Positive Jaws from faster revenue growth of 8ppt vs opex and lower effective tax rate (-6ppt; reversal of tax over allocation), supported the 9% rise in net profit. Without these, impaired loan allowances of RM68m (vs a net writeback of RM55m in 3QFY19) would have put a dent on earnings as operating profit contracted 3%.

YTD. The bad loans provision of RM128m (vs a net writeback of RM30m in 9MFY19) capped earnings from growing faster (+5%). Total income jumped 10% as investment income tripled, leading to pre-provision profit advancing by 14% while its effective tax rate was down 3ppt.

Other key trends. Loans growth gained momentum to 4.2% YoY (2QFY20: +2.0%), thanks to its wholesale and business banking. Whereas, deposits lost steam falling 1.0% YoY (2QFY20: +1.9%). Still, loan-to-deposit ratio (LDR) stood stubbornly high at 99% (flat sequentially). As for asset quality, gross impaired loans (GIL) ratio declined 6bp QoQ to 1.71% due to lower new bad loan formation (-14% QoQ).

Outlook. NIM slippage is seen to return in 4QFY20, no thanks to the recent OPR cut. However, gradual recovery should ensue in the following 3-6 months from downward deposit repricing (lagged impact) - this is expected to be short-lived on the back of its diminishing flexibility to optimize LDR (already at high levels of c.99%) and growing price-based rivalry for loans. That said, we see loans growth to chug along at current levels and not being able to accelerate any further, observing a tepid domestic macro climate. As for net credit cost, we see it normalizing up, in view of thinning recoveries.

Forecast. Despite 9MFY20 results coming in largely in line, we cut FY21-FY22 profit by 2% to factor in higher NIM slippage.

Keep HOLD but with a lower GGM-TP of RM3.95 (from RM4.05), following our profit cut and based on 0.64x CY20 P/B (from 0.65x) with assumptions of 7.1% ROE (from 7.2%), 9.5% COE, and 3.0% LTG. This is below its 5-year mean of 0.81x and the sector’s 0.92x. 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 - 28 Feb 2020