• 3QFY21 net profit came in at RM263.8m (-31% yoy; +11.2% qoq), while 9MFY21 net profit declined 20.8% yoy to RM866.3.5m. Results were below our and consensus estimates, and management is guiding for a weaker 4QFY21
• In our view, investor sentiment on the stock may stay negative for a prolonged period as confidence was shaken by the announcement of the RM2.83bn Global Settlement sum for its role in 1MDB
• We cut our FY21E net profit forecast by 15% to factor in additional provisions for legal expenses and raised the NCC from 85bps to 90bps. Maintain SELL, with our PT of RM2.90 unchanged (based on 0.5x P/BV target on CY22E BVPS).

9MFY21 Operating Results Intact, But Eroded by Provisions

Though AMMB’s 9MFY21 pre-provision profit looked intact with 9.7% yoy growth, it was eroded by elevated provisions (of RM662m, >400% increase yoy), whereby net credit cost (NCC) had risen to 79bps (annualized) vs. 16bps in 9MFY20. This was partially due to a macro provision buffer of RM274.5m (equivalent to 46bps) which management has set aside. Robust trading gains from the fixed income portfolio (at Treasury and Markets) continued to underpin 9MFY21 non-interest income, while fund-based income continued to see sequential recovery (9MFY21 NIM declined 8bps yoy to 1.85%; NIM continued to strengthen qoq to 2.03%). On a more positive note, AMMB’s loan book continued to expand, growing 4% ytd. As at 6 Feb21, AMMB had RM20.6bn (up from RM11.7bn) or 18% of its total loanbook (up from 11%) under repayment assistance (comprising retail at 64%, corporate at 17% and SME at 19%).

15% cut in FY21E earnings due to expectation of higher overheads and provisions

We cut our FY21E earnings by 15.2% in order to reflect additional overheads arising from the provision for legal expenses (hence raising our FY21E cost-to-income ratio to 49% from 45%) and raise our NCC assumption to 90bps (from 85bps).

Maintain SELL, Price Target Unchanged at RM2.90

We maintain our SELL rating with a PT of RM2.90 (based on a 0.5x P/BV on CY22E BVPS) underpinned by the FY22E ROE of 6.4% and cost of equity of 9.5%. We think investor sentiment will remain negative due to: i) liquidity issues from deposit withdrawals; ii) potential fines from authorities in other jurisdictions; and iii) higher near-term funding cost with a potential RM2.8bn of Tier-2 Capital being raised. Our assumptions for FY21E/22E/23E: loan growth at +5%/+4%/+4%; NIM at 1.89%/1.89%1.92%, net credit cost at 85/82/82bps and CIR at 49%/47%/46%. Upside risks: capital ratios uplift from FIRB adoption and divestiture; interest rate hikes; lower impaired loan provisions.

Source: Affin Hwang Research - 2 Mar 2021