• 1QFY21 net profit came in at RM365.2m (-6.7% yoy; +47.5% qoq), while underlying net profit (excluding the net modification loss impact of RM57.5m) stood at RM417m (+6.5% yoy; +11.2% qoq). Core net profit accounted for 35.8% of our FY21 forecast and 32% of consensus. Within expectations.
• As the quarters ahead remain uncertain, we maintain our earnings forecasts for FY21E-23E. There is potential downside risk to earnings from: i) additional top-up in provisions; and ii) additional rate cuts (25bps to 50bps).
• Maintain HOLD, with our PT of RM3.00 unchanged (based on 0.48x P/BV target).

1QFY21 core operating results were intact, excluding impact of ‘mod-loss’

AMMB’s underlying 1QFY21 net profit (excluding a mod-loss impact of RM57.5m and additional macro provision of RM10m) stood at RM417m (+6.5% yoy and +11.2% qoq) compared to a reported net profit of RM365.2m (-6.7% yoy and +47.5% qoq). Core operating income grew by 7.2% yoy and 12.5% qoq, as results were also propped up by robust trading gains from the fixed income portfolio (at Treasury and Markets). Other key takeaways include: i) NIM declined 36bps qoq and 28bps yoy to 1.59%. Excluding the Day-1 modification loss impact of RM57.5m, NIM stood at 1.74% (-13bps yoy); ii) loan growth was flat ytd; iii) 1QFY21 CIR at 49.3% (down 1.4ppts qoq and flat yoy); and iv) annualized NCC at 16bps vs. a credit recovery in 1QFY20 and 75bps in 4QFY20.

What to Expect Ahead? Downside Risks to Earnings Remain Down the Road

Downside risks on AMMB’s earnings remain, coming from: i) more top-up in provisions for ‘expected-credit-losses’ (ECL). It remains uncertain if there are more borrowers who may potentially require additional extension of time (whereby loans will be subject to R&R) after the loan moratorium period ends by Sept20. Should these loans trigger a significant increase in credit risk event (under IFRS9), i.e. a migration from Stage 1 to Stage 2, there may be a potential increase of RM200-300m in lifetime ECL provision (coming from RM15bn worth of loans under close scrutiny). At this juncture, AMMB is still in discussions with its auditors; ii) additional rate cuts – every 25bps rate cut is expected to shave off 3bps from AMMB’s NIM (net profit impact at - RM35m).

Maintain HOLD, Price Target Unchanged at RM3.00

We maintain our HOLD rating with a PT of RM3.00 (based on a 0.48x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 6.1% and cost of equity of 9.4%. Our underlying assumptions for FY21E: loan growth at -2.1% yoy, NIM at 1.81% (with no further rate cuts factored-in), net credit cost at 39bps and CIR at 55%. Downside/upside risks: interest rate cuts/hikes; higher/lower impaired loan provisions.

Source: Affin Hwang Research - 27 Aug 2020