AMMB’s 1QFY22 core profit jumped 7-fold QoQ, thanks to positive Jaws, fall in loan loss provision, together with better associates and JV income. Also, NIM widened sequentially, loans growth held steady, and asset quality was resilient. Overall, results were within estimates. That said, we still raise FY22-23 earnings by 4-5% as management guided for lower cost base. Also, we introduced FY24 forecasts. While valuations appear to be undemanding, there are no compelling catalysts to re-rate the stock. Maintain HOLD but with higher GGM-TP of RM3.00 (from RM2.85), based on 0.60x FY22 P/B.

Met estimates. AMMB registered 1QFY22 net profit of RM310m (+7-fold QoQ, -28% YoY on a core basis, after removing net modification gains/losses, global settlement, goodwill & investment in associate impairment across all quarters under review). This came in within expectations, forming 24-25% of our and consensus full-year forecasts.

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

QoQ. Core earnings jumped 7-fold on the back of positive Jaws (total income nudged up 1% while opex fell 6%), fall in loan loss provision (-59%) along with better income contribution from associates & JV (+4-fold). At the top, non-interest income (NOII) was up 4% due to investment-related showing while net interest margin (NIM) broadened by 6bp.

YoY. Negative Jaws that was created by the 4% drop in total income (NOII decreased 19% due to poor investment performance) together with the quadrupling in impaired loan allowances caused core bottom-line to fall 28%. However, the 8% decline in opex (thanks to lower personnel, establishment & marketing costs) helped to cushion some of the damage.

Other key trends. Loans growth remained steady at 7.6% YoY (4QFY21: +7.0%) but deposits lost traction to -0.2% YoY (4QFY21: +6.6%). As a result, loan-to-deposit ratio (LDR) spiked 6ppt sequentially to 101%. For asset quality, gross impaired loans (GIL) ratio ticked up 2bp QoQ due to its business banking division.

Outlook. We expect NIM to come under slight pressure premised on brewing deposit rivalry and limited scope for further CASA expansion. That said, loans growth is seen to taper before recovering again from gradual economic reopening under the National Recovery Plan. Separately, GIL ratio is likely to creep up but we are not overly worried as AMMB has made heavy pre-emptive provisioning in FY21 & we reckon credit risk has been adequately priced in by the market, seeing the high FY22 NCC assumption employed by us & consensus (above the normalized run-rate but below FY21’s level). Moreover, we believe the Government & BNM will continue to be supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. Despite in line results, we raise FY22-23 earnings by 4-5% as management guided for lower cost base. Also, we introduced FY24 estimates.

Keep HOLD but with higher GGM-TP of RM3.00 (from RM2.85), following our uplift in earnings. The TP is based on 0.60x FY22 P/B (from 0.57x) with the assumptions of 8.1% ROE (from 7.8%), 11.6% COE, and 3% LTG. This is at -1SD to its 5-year mean P/B and below the sector’s 0.88x. The discount is fair given its softer ROE output vs sector average (lower by 1ppt). Although valuations appear undemanding, there are no compelling catalysts to re-rate the stock. For mid-sized banks, we prefer RHB (TP: RM6.85) more for its stronger CET1 ratio and larger FVOCI reserve to buffer against any volatile yield curve.

Source: Hong Leong Investment Bank Research - 1 Sept 2021