AMMB’s 1QFY23 core earnings jumped 40% YoY, thanks to robust total income growth and drop in loan loss provision. Also, sequential NIM widened but loans growth lost traction and GIL ratio increased. Overall, results were largely within expectations and thus, forecasts were unchanged. That said, we introduce FY25 financial estimates. We still find the stock’s risk-reward profile to be balance. Maintain HOLD and GGM-TP of RM3.80, based on 0.71x FY23 P/B.

Largely in line. Stripping off net modification gains/losses, AMMB booked in 1QFY23 core net earnings of RM435m (+10% QoQ, +40% YoY). This was broadly in line with expectations, making up 28-29% of our and consensus full-year forecasts.

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

QoQ. Core profit increased 10%, thanks to positive Jaws (total income grew 6% while opex fell 3%) coupled with smaller provision for financial investments, commitments, and contingencies (-98%). However, the absence of management overlay writebacks capped earnings from travelling at a faster clip. At the top, (i) net interest margin (NIM) expanded 12bp given OPR hike and (ii) non-interest income (NOII) ticked up 2% due to better underwriting insurance business, fees and investment-related performance.

YoY. The combination of 7% total income growth and 68% drop in allowances for bad loans, helped core bottom-line to rise 40%. Again, income drivers came from widening NIM (+7bp) and loans growth (+4%). However, NOII was a drag, declining 23% on the back of weaker fees and investment showing.

Other key trends. Loans and deposits growth lost traction to +3.9% YoY (4QFY22: +4.6%) and +6.4% YoY (low base effect in 1QFY22; 4QFY22: +1.9%) respectively. In turn, loan-to-deposit ratio (LDR) was sequentially up to 1ppt to 99%. For asset quality, gross impaired loans (GIL) ratio rose 15bp QoQ to 1.55% due to larger NPL formation at both the retail and construction segments.

Outlook. Following Jul-22’s OPR hike, NIM is seen to continue expand sequentially. However, the magnitude may be capped by downward CASA mix normalization. That said, loan growth is anticipated to pick up in subsequent quarters, given strong credit pipeline at its corporate segment. Also, the recent down trending MGS yield is seen to provide some respite to its investment showing over the short term. Separately, loan loss provision is expected to escalate upwards due to forward looking adjustments to account for latency in credit loss from rate increases. Besides, GIL ratio is likely to rise but we are not overly worried, since AMMB still has decent amount of FY21-22 pre emptive provisions left to cushion this impact. Moreover, FY23-24 NCC assumptions pencilled in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY21-22’s level).

Forecast. Unchanged since 1QFY23 results were broadly in line with expectations. That said, we introduce FY25 financial estimates.

Retain HOLD and GGM-TP of RM3.80, based on 0.71x FY23 P/B with assumptions of 8.8% ROE, 11.2% COE, and 3.0% LTG. This is slightly above its 5-year mean of 0.67x but below sector average of 0.93x. The premium/discount is fair given its ROE output is 2ppt/1ppt above/below its 5-year average/industry. Although we think share price going forward will be buoyed by its potential inclusion into FBMKLCI, we find that the market has been overly generous in re-rating the stock, especially when its better ROE was attained through re-engineered balance sheet (to a large extend). For mid-sized banks, we continue to prefer RHB (TP: RM7.00) for its stronger CET1 ratio and undemanding valuations.

Source: Hong Leong Investment Bank Research - 18 Aug 2022