AMMB’s 3QFY23 profit jumped 18% YoY, thanks to robust total income growth and drop in loan loss provision. Also, sequential NIM widened. However, loans growth lost steam and asset quality deteriorated. Overall, results beat estimates and hence, we raise FY23-25 earnings by 3-4%. Although AMMB’s outlook is not exactly the brightest, its recent share price slump provides a more favourable risk-reward profile; valuations are inexpensive and the adoption of FIRB come potentially in 2024 may lead to larger dividend payout. Upgrade to BUY call with a higher GGM-TP of RM4.35 (from RM4.20), based on 0.77x CY23 P/B.

Ahead of expectations. AMMB chalked in 3QFY23 net profit of RM453m (-4% QoQ, +18% YoY), bringing 9MFY23 sum to RM1.3bn (+28% YoY). This beat expectations, making up 80-81% of our and consensus full-year forecasts; key variance came from stronger-than-expected total income growth.

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

QoQ. Profit declined 4%, no thanks to higher loan loss provision (tripled). Otherwise, we saw top-line increased 4% given strong non-interest income growth (NOII, +40%); this was backed mainly by better fees and treasury performance. Moreover, loans and net interest margin (NIM) also expanded 1.6% and 2bp respectively.

YoY. The combination of 14% total income growth and 19% drop in provision for bad loans, helped bottom-line to increase 18%. Again, income drivers came from stronger NOII (+25%; better trading gains), widening NIM (+14bp) and loans growth (+5.9%).

YTD. Again, earnings rose 28% due to top-line growth (+11%) and lower provision for impaired loans (-40%).

Other key trends. Both loans and deposits growth lost pace to +5.9% YoY (2QFY23: +7.6%) and -0.4% YoY (2QFY23: +4.3%) respectively. However, loan-to-deposit ratio (LDR) inched down sequentially by 1ppt to 102%. As for asset quality, gross impaired loans (GIL) ratio shot up 10bp QoQ to 1.62%, owing primarily to the deterioration at its manufacturing, utilities, and retail segments.

Outlook. We expect sequential NIM to shrink given: (i) repricing of matured deposits, (ii) CASA being utilized and substituted to FD, (iii) price competition for FD is still stiff, along with (iv) diminishing flexibility to optimize LDR (already at high levels of 102%). That said, potential upgrade in credit rating (thanks to its successful capital restoration efforts) could help to alleviate some cost of funding pressure in the future. Separately, lending growth is seen to moderate due to a softer domestic macro climate. Besides, GIL ratio is likely to rise but we are not overly worried as we believe AMMB is better equipped vs prior slumps; the large pre-emptive allowances built up in FY21-22 and 2Q-3QFY23 to combat Covid-19 pandemic woes and latency in credit loss from OPR hikes, act as robust buffer to cushion for any short-term asset quality weakness.

Forecast. Considering 3QFY23 results beat expectations, we raise FY23-25 earnings by 3-4% to reflect the stronger-than-expected total income growth.

Upgrade to BUY rating with a higher GGM-TP of RM4.35 (from RM4.20), following the uplift in profit and rolling our valuation to CY23 from FY23. The TP is based on an unchanged 0.77x P/B with assumptions of 9.6% ROE (from 9.5%), 11.6% COE, and 3.0% LTG. This is above its 5-year average of 0.66x but below the sector’s 0.85x; the premium/discount is warranted given its ROE output is 2ppt/1ppt above/beneath its 5- year mean/industry.

Although AMMB’s outlook is not exactly the brightest, its recent price slump provides a more favourable risk-reward profile. We find AMMB’s valuations to be inexpensive and the adoption of foundation internal rating-based (FIRB) come potentially in 2024 would help to raise its CET1 ratio (preliminarily guided to reach 14.0% vs the current 12.3%, without transitional arrangements); this creates headroom for larger dividend payout in the future.

Source: Hong Leong Investment Bank Research - 24 Feb 2023