• 2QFY21 net profit came in at RM237.3m (-25.7% yoy; -35% qoq), while 1HFY21 net profit declined 15.3% yoy to RM602.5m. As management guided for a bleaker outlook for 2HFY21 with potentially rising provisions, AMMB’s results are within our expectation but below consensus estimates.
• 1HFY21 net credit cost rose to 73bps (annualized) vs. 12bps in 1HFY20, as management set aside a macro provision buffer of RM215m. Overall, the 1HFY21 provision rose 570% yoy (with the bulk of it from 2QFY21).
• Downgrade to SELL from HOLD, with our 12-month PT of RM3.00 unchanged (based on a 0.46x P/BV target).

1HFY21 operating results underpinned by robust non-interest income growth

AMMB’s 1HFY21 operating income came in at RM2,225.8m (+4.6% yoy), underpinned by robust trading gains from the fixed income portfolio (at Treasury and Markets) and sequential recovery in fund-based income in 2QFY21 (with the absence of the Day-1 mod-loss impact, the unwinding effect and repricing down of deposit costs). 2QFY21 saw a recovery in NIM of 33bps qoq to 1.92%, while 1HFY21 NIM declined 13bps yoy to 1.76%, impacted by rate cuts and the mod-loss. On a more positive note, AMMB’s loan book continued to expand, growing 3.1% ytd (driven by mortgages and business loans).

Building up more provision buffers, in the event of a spike in default cases

In our view, our earnings forecasts for FY21E/22E/23E are conservative, though we are making some adjustments on our assumptions for a more robust level of non-interest income and raising our net credit cost assumption (from 30-40bps) to around 85-90bps, in line with management’s latest guidance (85-100bps). The overall impact of these changes to earnings is marginal. For now, management is concerned over credit risk emerging in wholesale banking loans currently under Stage 2 as well as potential defaults of borrowers currently under repayment assistance. As at 13 Nov, AMMB had RM11.7bn or 11% of its total loanbook under repayment assistance (comprising retail at 42%, corporate at 31% and SME at 27%).

Downgrade to SELL (from HOLD), Price Target unchanged at RM3.00

We downgrade our rating from HOLD to SELL with our PT unchanged at RM3.00 (based on a 0.46x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 5.9% and cost of equity of 9.3%. We think investors should lock in gains given the recent run-up in the share price. Our revised assumptions for FY21E/22E/23E: loan growth at 5% / 4% / 4%; NIM at 1.9%-1.95%, net credit cost at 85-90bps and CIR at 50%. Downside/upside risks: interest rate cuts/hikes; higher/lower impaired loan provisions.

Source: Affin Hwang Research - 1 Dec 2020