AMMB’s 1QFY21 core earnings rose 71% QoQ due to stronger total income and lower loan loss provision. Besides, loans growth gained mild traction and asset quality held steady. However, NIM contracted sequentially. Overall, results beat estimates due to better-than-expected NOII; we raise FY21 net profit forecast by 10% but keep FY22-23 estimates. AMMB’s risk-reward profile remains balanced as there are no compelling re-rating catalysts, despite undemanding valuations. Retain HOLD but with higher GGM-TP of RM3.15 (from RM3.00), based on 0.47x CY21 P/B.

Above expectations. Excluding net modification loss, AMMB reported 1QFY21 core earnings of RM424m (+71% QoQ, +8% YoY). This beat estimates, making up 38-39% of our and consensus full-year forecasts; key deviation was from better-than-expected non-interest income (NOII).

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

QoQ. Core bottom-line increased 71% due to stronger total income (+13%) and lower loan loss provision (-78%). At the top, NOII tripled given RM198m investment-related gains vs RM53m losses in 4QFY20. However, net interest margin (NIM) slipped 21bp, no thanks to a series of OPR cuts.

YoY. The provision for bad loans of RM43m (vs net writeback of RM45m in 1QFY20) capped core earnings from growing faster (+8%). Total income rose 7% on the back of stronger investment-related gains (doubled), which helped to lift pre-provision profit by 13%.

Other key trends. Loans growth gained mild traction to 6.5% (4QFY20: +5.3%) while deposits accelerated to 11.1% YoY (4QFY20: +5.5%); this resulted in loan-to-deposit ratio (LDR) inching down 1ppt QoQ to 94%. As for asset quality, gross impaired loans (GIL) ratio improved 7bp sequentially, given the effect of loan moratorium.

Outlook. With potentially another OPR reduction (-25bp) in 2H20, we believe this will continue to exert pressure on NIM. Also, loans growth is anticipated to taper as Covid- 19 related headwinds drag performance. Separately, we expect GIL ratio to remain at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from AMMB; however, this may mask actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve expeditiously or an advent of Covid-19 second wave paralyses the country again.

Forecast. We raise FY21 net profit forecast by 10% to factor in better NOII but keep FY22-23 estimates, as we see downward normalising investment-related income.

Reiterate HOLD but with a higher GMM-TP of RM3.15 (from RM3.00), following our profit uplift and based on 0.47x CY21 P/B (from 0.45x) with assumptions of 6.2% ROE (from 6.1%), 9.8% COE, and 3.0% LTG. This is below its 5-year average of 0.74x and the sector’s 0.78x. The discount is fair given its falling ROE trend (2-3ppt lower vs 5- year and sector mean). While valuations appear to be undemanding (trading close to - 2.0SD P/B), there are no compelling catalysts to re-rate the stock. Management also sounded cautious on its near-term outlook. In our opinion, AMMB’s risk-reward profile remains balance

Source: Hong Leong Investment Bank Research - 27 Aug 2020