AMMB’s 3QFY22 core profit declined 22% YoY, no thanks to weak total income and higher loan loss provision. However, sequential NIM widened, loans growth gained traction, and GIL ratio fell. Overall, results were below expectations and thus, we cut FY22 bottom-line by 2% to factor in the profit miss, prosperity tax, and 1MDB global settlement tax provision reversal. That said, we keep FY23-24 intact. Although valuations appear to be undemanding, there are no compelling catalysts to re-rate the stock significantly higher. Maintain HOLD and GGM-TP of RM3.30, based on 0.62x FY22 P/B.

Below estimates. After adjusting for net modification gains/losses, prosperity tax, and tax provision reversal relating to the 1MDB global settlement last year, AMMB posted 3QFY22 core earnings of RM223m (-31% QoQ, -22% YoY), bringing 9MFY22 total to RM854m (-11%). This was below our estimates, making up 67% of full year forecasts but was in line with consensus at 70%; key variance came from higher-than-expected loan loss provision.

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

QoQ. Core earnings fell 31% given higher allowance for bad loans (+81%). That said, top-line grew by a decent 3%, thanks to net interest margin (NIM) expansion of 2bp and loans growth of 3%; however, this was stunted slightly by the 1% decline in non interest income (NOII, -1%) as investment performance was weak (-31%).

YoY. Negative Jaws from weak total income (-3%) coupled with higher impaired loans provision (+15%) caused core net profit to decrease 22%.

YTD. The 11% fall in core bottom-line came on the back of the decline in total income (-4%) and higher effective tax rate (+3ppt). The drag at the top was due to weak NOII (-13%) as a result of sluggish investment showing (-53%). That said, lower provision for impaired loans (-2%) helped to cushion some of the damage.

Other key trends. Both loans and deposits growth gained momentum to +6.6% YoY (2QFY22: +4.5%) and +4.8% YoY (2QFY22: +0.7%) respectively. In turn, sequential loan-to-deposit ratio (LDR) fell 4ppt to 96%. As for asset quality, gross impaired loans (GIL) ratio dropped 9bp QoQ due to write-offs, recoveries, and a larger loan base.

Outlook. Following seasonal deposit rivalry in Oct-Dec, we expect sequential NIM to hold steady at current levels. That said, this is seen to expand when BNM hikes OPR later this year. Also, loans growth is expected to chug along given economic recovery. On a separate note, GIL ratio is likely to creep upward but we are not overly worried as AMMB has already made heavy FY21 pre-emptive provisioning and in our opinion, credit risk has been adequately priced in by the market, looking at the elevated NCC assumption applied for FY22 by both us and consensus (above normalized run-rate but below FY21’s level).

Forecast. We cut FY22 earnings by 2% to factor in the profit miss, prosperity tax, and 1MDB global settlement tax provision reversal. However, we keep FY23-24 intact.

Retain HOLD and GGM-TP of RM3.30, based on 0.62x FY22 P/B with assumptions of 8.1% ROE, 11.2% COE, and 3.0% LTG. This is below its 5-year mean of 0.69x and sector average of 0.92x. The discount is fair given its relatively lower ROE output vs sector mean and there are no compelling catalysts to re-rate the stock significantly higher. For mid-sized banks, we continue to prefer RHB (TP: RM6.60) for its stronger CET1 ratio and undemanding valuations.

Source: Hong Leong Investment Bank Research - 28 Feb 2022