AMMB’s 2QFY23 profit jumped 57% YoY, thanks to robust total income growth and drop in loan loss allowances. Also, sequential NIM widened, loans growth gained traction, and GIL ratio nudged down. Overall, results beat estimates and hence, we raise FY23-25 profit by 6-9%. That said, we still find the stock’s risk reward profile to be balance. Retain HOLD but with a higher GGM-TP of RM4.20 (from RM3.80), based on 0.77x FY23 P/B.

Beat expectations. AMMB posted 2QFY23 net profit of RM469m (+16% QoQ, +57% YoY), bringing 1HFY23 sum to RM873m (+34% YoY). This beat expectations, making up 55-57% of our and consensus full-year forecasts; key variance came from smaller than-expected loan loss provision.

Dividend. 1st interim DPS of 6sen (2QFY22: nil) was proposed. Ex-date: 14 Dec.

QoQ. Profit jumped 16%, thanks to positive Jaws (total income grew 9ppt faster than opex); we saw net interest margin (NIM, +2bp) and loans (+3.5%) expansion, coupled with better treasury performance. However, higher impaired loan allowances (+23%) capped earnings from travelling at a faster clip.

YoY. The combination of 18% total income growth and 37% drop in provision for bad loans, helped bottom-line to increase 57%. Again, income drivers came from widening NIM (+14bp) and loans growth (+7.6%). However, NOII was a drag, falling 9% on the back of weaker fees and investment-related showing.

YTD. Again, earnings spiked 34% given top-line growth (+9%) and lower provision for impaired loans (-56%).

Other key trends. Loans growth gained traction to +7.6% YoY (1QFY23: +3.9%) but deposits lost momentum to +4.3% YoY (1QFY23: +6.4%). In turn, loan-to-deposit ratio (LDR) was sequentially up to 4ppt to 103%. As for asset quality, gross impaired loans (GIL) ratio ticked down 3bp QoQ to 1.52% due to a larger loan base.

Outlook. We see smaller sequential NIM expansion given: (i) bulk of the FD typically will be repriced 6-9 months from the first OPR hike (kick-started in May-22), (ii) CASA being consumed and substituted to FD, along with (iii) price competition for FD. That said, loans growth is expected to chug along for now. Separately, loan loss provision is expected to escalate up due to forward looking adjustments to account for latency in credit loss from rate increases. Also, 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. Following the earnings beat in 2QFY23, we raise FY23-25 profit by 6-9% to account for the lower loan loss provision.

Retain HOLD call but with a higher GGM-TP of RM4.20 (from RM3.80), following the upward revision in profit. The TP is based on 0.77x FY23 P/B (from 0.71x) with the assumptions of 9.5% ROE (from 8.8%), 11.5% COE, and 3.0% LTG. The premium/ discount is fair given its ROE output is 2ppt/1ppt above/beneath its 5-year average/ industry. Despite the good results and inclusion into FBMKLCI, we find that the market has been overly generous in re-rating the stock, especially when its better ROE was partly attained via re-engineered balance sheet. 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 - 1 Dec 2022