In our view, AMMB’s operating outlook is cloudy and its credit quality could turn weaker (in FY21E), driven by headwinds from the Covid-19 outbreak in Malaysia and the slump in commodity and oil prices. Subsequent to revisions to our earnings forecasts, TP and rating on 16 Mar (in our Strategy report), we cut our earnings forecasts further by 18-28%, as we price in more provisions and lower our non-interest income and loan growth expectations for FY21-22E, and lower the TP to RM2.56. Maintain SELL.

Potentially Higher Provisions on the Horizon, Still Under Assessment

We understand from management that AMMB may raise its provisions in FY21E, driven by the collapse in oil prices and a macroeconomic-led slowdown (exacerbated by the Covid-19 outbreak). Asset quality in the oil & gas (O&G) sector (2% of loanbook, Fig 3), may be at risk, given the exposure in two accounts totalling over RM1bn.

COVID-19 May Have a Prolonged Negative Impact

In management’s view, the Covid-19 outbreak may have a prolonged negative impact on industries and businesses, though NPLs may not show up on banks’ books in the first 6-7 months due to ‘rescheduling & restructuring’ initiatives. Management’s net credit cost guidance of 15- 20bps remains unchanged for the first 11 months of FY20E. However, management may take into account additional overlay on credit cost assumptions for March20 and beyond; hence it is likely to be higher.

Other Key Takeaways From Management Discussion

i) AMMB has received applications for a moratorium period for a total of RM450m due to business disruption from the Covid-19 outbreak; ii) balance sheet liquidity remains solid, despite the decline in LCR from 163% (Dec19) to 130% (in Mar20) due to shifts in institutional funds to shorter-term deposits and increased REPO activities for bond trading; iii) FY20 NIM may average 1.9-1.93% vs. 1.89% in FY19.

Maintain SELL, PT Lowered to RM2.56 From RM2.90

Maintain SELL. We lower our Price Target for AMMB from RM2.90 (based on a 0.47x P/BV on CY20E BVPS) to RM2.56 (methodology changed: now based on a P/BV target multiple of 0.5x on CY20E adjusted BVPS of RM5.09). Upside risks: ease in the Covid-19 outbreak; rate hikes.

Source: Affin Hwang Research - 20 Mar 2020