AMMB’s 4QFY20 core earnings declined 35% QoQ due to weak total income and higher loan loss provision. Also, NIM contracted sequentially. However, lending growth accelerated while asset quality held steady. Overall, results were largely within estimates but with weaker management guidance, we cut FY21-22 profit by 1-10%. Overall, AMMB’s risk-reward profile remains balanced as there are no compelling re-rating catalysts, despite undemanding valuations. Maintain HOLD but with a lower GGM-TP of RM3.00 (from RM3.40), based on 0.45x CY21 P/B.

Largely within expectations. Excluding the one-off retail debt sale gain (in 4QFY19), AMMB posted 4QFY20 core earnings of RM248m (-35% QoQ, +9% YoY) and in turn, brought FY20 adjusted net profit to RM1.3bn (+5%). This was broadly in line with expectations, making up 95-102% of our and consensus full-year forecasts.

Dividend. Declared a final DPS of 7.3sen (-51% YoY), which brought full-year DPS to 13.3sen (-34% YoY). Ex-date is 16 July. The overall payout ratio fell to 30% from 40% as management attempts to conserve capital.

QoQ. Core bottom-line dropped 35% due to weak total income (-9%) and higher loan loss provision (tripled). At the top, non-interest income (NOII) declined 53%, no thanks to investment losses and poor fee revenue (-14%). Besides, net interest margin (NIM) slipped 7bp.

YoY. Positive Jaws from quicker revenue growth of 22ppt vs opex and lower effective tax rate (-17ppt due to lower taxable income), supported the 9% rise in core net profit. Without these, impaired loan allowances of RM195m (vs a net writeback of RM272m in 4QFY19) would have put a dent on earnings as operating profit contracted 51%.

YTD. The provision for bad loans of RM323m (vs net writeback of RM301m in FY19) capped core earnings from growing faster (+5%). Total income rose 8% on the back of NIM expansion and loans growth, led pre-provision profit to advance 20% while its effective tax rate was down 5ppt.

Other key trends. Lending growth gained momentum to 5.3% YoY (4QFY20: +4.2%) while deposits accelerated to 5.5% YoY (4QFY20: -1.0%); this resulted in loan-to deposit ratio (LDR) falling 4ppt QoQ to 95%. As for asset quality, gross impaired loans (GIL) ratio was up 2bp QoQ to 1.73% due to mortgage and agriculture segments.

Outlook. NIM pressure is seen to persist into following quarters given May-20’s 50bp OPR cut and possibly another 25bp reduction in 2H20. Also, with the confluence of events from Covid-19 crisis and imminent recession, loans growth is anticipated to taper. Besides, asset quality is poised to weaken but it should not spiral out of control (at least till end Sep-20); this is because Malaysian borrowers were granted 6-mth loans deferment while any restructuring & rescheduling (R&R) o f loans affected by Covid-19 will not be tagged as impaired.

Forecast. Although 4QFY20 results were broadly within expectations, management is guiding for weaker FY21. Hence, we cut FY21-22 profit by 1-10% to factor in higher NIM slippage and net credit cost assumptions. Also, we introduce FY23 estimates.

Maintain HOLD but with a lower GGM-TP of RM3.00 (from RM3.40), following our profit cut and roll valuations to CY21. The TP is based on 0.45x P/B (from 0.55x) with assumptions of 6.1% ROE (from 6.7%), 9.8% COE, and 3.0% LTG. This is beneath its 5-year average of 0.75x and the sector’s 0.79x. The discount is fair given its falling ROE trend (2-3ppt lower vs 5-year & sector mean). Despite undemanding valuations, there are no compelling catalysts to re-rate the stock.

Source: Hong Leong Investment Bank Research - 30 Jun 2020