AMMB’s 4QFY21 core profit declined 84% QoQ due to negative Jaws and higher loan loss provision. Also, NIM compressed sequentially. However, loans growth held firm and GIL ratio ticked downwards. Overall, results missed estimates and thus, we cut FY22-23 profit by 1-3%. While valuations seem to be undemanding, there are no compelling catalysts to re-rate the stock. Reiterate HOLD but with lower GGM-TP of RM2.85 (from RM2.90), based on 0.57x FY22 P/B.

Below expectations. Excluding net modification gains, global settlement, goodwill & investment in associate impairment, AMMB reported core net profit of RM46m (-84% QoQ, -81% YoY), bringing FY21 sum to RM1bn (-25% YoY), This came in below our expectations, forming only 91% of full-year forecasts but was in line with consensus (at 99%); key variance was higher-than-expected loan loss provision.

Dividend. None declared as guided earlier due to the RM2.83bn global settlement.

QoQ. Core profit decreased 84% on the back of negative Jaws (total income declined 4ppt quicker than opex) and higher impaired loan allowances (+77%). At the top, we saw net interest margin (NIM) compressed 4bp. However, non-interest income (NOII) was up 11%, backed by better showing at its insurance unit (+19%) and investment related income (+44%).

YoY. The spike in provision for bad loans (+2-fold) dragged core profit down by 81%. This was cushioned by the faster 9% rise in total income compared to opex (+5%).

YTD. The 25% drop in core bottom-line was again owing to impaired loan allowances (+4-fold) and softened by positive Jaws (total income +9% vs opex +1%).

Other key trends. Loans growth remained steady at 7.0% YoY (3QFY21: +7.0%) but deposits lost some traction to 6.6% YoY (3QFY21: +12.6%). As result, loan-to-deposit ratio was inched up to 95% (+1ppt QoQ). For asset quality, gross impaired loans (GIL) ratio was down 19bp QoQ due to its retail & business banking divisions.

Outlook. 1MDB headwinds were laid to rest and hence, we do not expect to see large one-off expenses cropping up again. Besides, AMMB’s books are cleaner than before. Going forward, NIM is expected to remain stable premised on no OPR cut (since it is already at an all-time low) along with benign deposit competition in 2021. Also, loans growth is seen to chug along despite Covid-19 glooms as AMMB grabs market share from peers. Separately, GIL ratio is likely to creep up but we are not overly concerned as AMMB has made heavy pre-emptive allowances throughout FY21 and we reckon credit risk has been adequately priced in by the market, looking at the high FY22 NCC assumption employed by us and consensus (above the normalized run-rate but below FY21’s level). Also, we believe the Government & BNM will continue to be supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. We cut FY22-23 profit by 1-3% to reflect higher loan loss provision.

Retain HOLD but with lower GGM-TP of RM2.85 (from RM2.90), following our profit cut. The TP is based on 0.57x FY22 P/B with assumptions of 7.8% ROE, 11.6% COE, and 3.0% LTG. This is at -1.5SD of its 5-year mean P/B and below the sector’s 0.88x. The discount is fair given its softer ROE generation vs sector average (lower by 1ppt). While valuations appear to be undemanding, there are no compelling catalysts to re rate the stock. Although AMMB’s books are cleaner (thus, fitter for a potential M&A in the future), it has to cope with less than favourable perception after the unexpected global settlement and surprise capital raising.

Source: Hong Leong Investment Bank Research - 1 Jun 2021