AMMB’s 3QFY21 core profit declined 26% YoY due higher loan loss provision. Besides, loans growth tapered slightly and GIL ratio has creeped upwards. That said, NIM improved sequentially. Overall, results beat expectations and thus, we narrow FY21 losses and raise FY22-23 profit by 8%. As for the RM2.83bn global settlement issue, we believe AMMB is capable of weathering the storm and be successful again in rebuilding its image and shake off any negative perception. Maintain HOLD with unchanged GGM-TP of RM2.95, based on 0.50x FY22 P/B.

Above expectations. Excluding net modification loss, AMMB reported 3QFY21 core profit of RM284m (+14% QoQ, -26% YoY), bringing 9MFY21 sum to RM964m (-12% YoY). This beat estimates, forming 93-96% of our and consensus full-year forecasts (ex-global settlement); key variance was better-than-expected total income growth.

Dividend. AMMB is freezing its FY21 payout due to the RM2.83bn global settlement with the Ministry of Finance.

QoQ. Core earnings increased 14% on the back of lower loan loss provision (-29%). However, negative Jaws was present due to opex rising 4% while total income growth was tepid (+1%); non-interest income (NOII) fell 18% given weaker investment-related performance (-65%). That said, net interest margin (NIM) improved 9bp.

YoY. The spike in provision for bad loans (+4-fold) dragged core profit down by 26%. This was cushioned by the 8% rise in total income and 1% drop in opex.

YTD. The 12% drop in core bottom-line was again owing to impaired loan allowances (+5-fold) and softened by positive Jaws (total income +9% vs flat opex).

Other key trends. Loans growth tapered slightly to 7.0% YoY (2QFY21: +8.4%) while deposits inched up to 12.6% YoY (2QFY21: +12.0%). As result, loan-to-deposit ratio was down to 94% (-2ppt QoQ). For asset quality, gross impaired loans (GIL) ratio was up 16bp QoQ due to its retail banking division.

Outlook. Indeed, the RM2.83bn damage for its alleged past involvement in the 1MDB scandal is a significant negative hit; AMMB now looks to move forward from this unfortunate chapter of its history. Back in 2015 (the year when the bank was fined by BNM), bad publicity led to loans growth stalling with deposits falling 2% YoY. However, the new management was able to steer the bank back to the path of growth, consistently every year leading up to this event (loans & deposits grew by a 5-year CAGR of 5%). Thus, we believe AMMB is capable of weathering the storm and be successful again in battling to rebuild its image and shake off the negative perception. In turn, we do not expect any major setbacks to future growth.

Forecast. With the better-than-expected 3QFY21 results, we narrow FY21 losses to RM1.7bn from RM1.9bn. Also, we raise FY22-23 profit by 8%.

Maintain HOLD with unchanged GGM-TP of RM2.95, despite raising our net profit forecasts. This is based on 0.50x FY22 P/B (unchanged) with assumptions of 7.1% ROE (from 6.7%), 11.3% COE (from 10.4% to impute higher risk premium), and 3.0% LTG. This is at -1.5SD of its 5-year average P/B and beneath the sector’s 0.90x. The discount is fair given its falling ROE trend (1-2ppt lower vs 5-year and sector mean). All in all, 1MDB is a legacy issue. Now, AMMB is run by a new management team and was doing well, on stronger footing, before this RM2.83bn global settlement came into the picture. We would turn buyers of the stock at the RM2.50-2.70 level (at -2SD).

Source: Hong Leong Investment Bank Research - 8 Mar 2021