AMMB’s 2QFY21 core earnings fell 42% QoQ due to higher loan loss provision. However sequential NIM improve, loans growth accelerated and GIL ratio ticked down during the quarter. That said, although results were in line, we lower FY21 profit forecast by 17% to reflect higher bad loan allowances (as AMMB guided for more pre-emptive provisioning efforts) but maintain FY21-22 estimates. We now turn positive on AMMB given leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the war against the virus. Upgrade to BUY and higher GMM-TP of RM3.70 (from RM3.15), based on 0.55x FY22 P/B.

Within estimates. Excluding net modification loss (in 1Q & 2QFY21), AMMB reported 2QFY21 core earnings of RM249m (-42% QoQ, -22% YoY), bringing 1HFY21 sum to RM680m (-4% YoY). This was in line with expectations, making up 56-58% of our and consensus full-year forecasts.

Dividend. None as AMMB Takes a Wait and See Approach, Before Divvying in 4Q.

QoQ. Core bottom-line declined 42% due to higher loan loss provision (+8-fold). That said, it displayed positive Jaws as total income ticked up 1% while opex fell 3%. At the top, net interest margin (NIM) improved 12bp, thanks to better deposit mix.

YoY. Similarly, the spike in provision for bad loans (+3-fold) dragged core profit down by 22%. This was cushioned by the 9% rise in total income on the back of better fees (+9%), investment-related gains (+6%), and robust loans growth (+8%).

YTD. The 4% drop in core earnings was again owing to higher allowance for impaired loans (+7-fold) and was softened by positive Jaws (total income +9% vs opex +1%).

Other key trends. Both loans and deposits grew at a quicker pace of 8.4% (1QFY21: 6.5%) & 12.0% YoY (1QFY21: 11.1%). However, the sequential loan-to-deposit ratio (LDR) was still elevated at 96% (+2ppt QoQ). For asset quality, gross impaired loans (GIL) ratio improved 9bp QoQ, given the effect of loan moratorium.

Outlook. We see subsiding NIM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NIM recovery. That said, loans growth is seen to chug along despite Covid-19 headwinds as AMMB grabs market share from peers. Separately, we expect GIL ratio to remain at low levels in 1H21, since troubled borrowers can seek for targeted assistance from AMMB; however, it may hide actual damage and lead to a lag in NPL formation if the situation does not improve swiftly. As such, management is likely to step up their pre-emptive provisioning in the short-haul but it will drop and normalize progressively.

Forecast. Despite results coming in line, we cut FY21 profit forecast by 17% to reflect higher impaired loan allowances as AMMB guided for more pre-emptive provisioning efforts. However, FY22-23 estimates were kept as they seem reasonable for now.

Raise to BUY (from Hold) & higher GMM-TP of RM3.70 (from RM3.15), as we roll valuations to FY22; TP is based on 0.55x FY22 P/B (from 0.47x) with assumptions of 6.2% ROE, 8.8% COE (from 9.8% to account for risk-on mode and sector rotation into recovery stocks), and 3.0% LTG. This is below its 5-year average of 0.71x and the sector’s 0.85x. The discount is fair given its falling ROE trend (2-3ppt lower vs 5-year and sector mean). We turn positive on AMMB given leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the battle against the virus; this would spur a faster economic recovery, owing to improve business and consumer confidence along with more lenient safety distancing measures. Also, it alleviates strain on businesses, which in turn curbs NPL formation.

Source: Hong Leong Investment Bank Research - 1 Dec 2020