9MFY20 results missed, coming in at 67% of our full year expectations. We, cut our FY20E earnings by 9% on account of lower loans and higher provisioning. Subscribing to a lower PBV of 0.7x (2SD below mean) on account of uncertainties ahead, we reduce TP to RM2.90 but maintain OUTPERFORM call as dividend yields are attractive and valuations undemanding. Provisions taper. 9MFY20 CNP of RM362m fell below/in line with our/consensus accounting for 67%/71% of respective estimates. Although provisions are tapering in the 2H20. the amount of provisions are still likely to come in higher than expected , Hence, we are looking at ABMB to end the year with RM270m provisioning as guided by management. For the period under review, loans moderated to +5% (vs guidance/estimates of ~6%).

YoY, CNP fell 23% on account of higher provisioning (RM175m) owing to a sharp rise in provisioning in 1HFY20 due to delinquent corporate accounts which impacted 1QFY20 while 2QFY20 was impacted by impairments to mortgage loans in the Alliance One Account (AOA) accounts. Topline moderated to +4% as NII fell 2% coming under pressure from: (i) underperforming NIM (-13bps) due OPR cut and delinquency pricing revision, and (ii) moderate loans. Despite the moderate loans, both consumer and SME performed satisfactorily at +5% and +11%, respectively. Its NOII was strong at +17% due to realized gain from bond sale (RM12m), and lower interest expense (RM20m) from Structured Investments. Cost discipline was still maintained as CIR saw just 1bps uptick to 48%. YoY, asset quality deteriorated by 60bps to 1.9% mainly related to the AOA accounts with credit charge ending 24bps higher to 0.54%.

QoQ, CNP of RM134m surged 16% on account of fall in impairment allowances (-46%) to RM42m. Topline fell marginally to RM424m dragged by falling NOII (-15%) mitigated by strong Islamic Income (+10%) and flattish NII, which can be attributed to marginal growth in loans (<+1%) and slight improvement in NIM (+2bps) due to re-pricing of funding costs. GIL saw a 20bps uptick but conventional mortgage and AOA GIL net inflow slowed in the period under review with both showing inflow of RM45m and RM71m, respectively (vs. 2Q; RM54m and RM78m, respectively).

Loans target revised. No change in management’s guidance with the exception of loans; target revised down by 1ppt to +5%. The rest are unchanged; (i) NIM compression of 13bps, and (ii) credit charge of 40- 45bps in loans with additional credit charge of 15bps on its bond impairments. Loans are revised downwards due to credit tightening in Personal Financing, AOA accounts and SMEs. Impact of Covid-19 is too premature to gauge with direct and indirect portfolio exposure at ~2%.

Earnings revised. Our FY20E/FY21E earnings are revised downwards by 9%/7%, respectively, to RM445m/RM538m. FY20E assumptions: (i) loans at <+5% (from +6%), (ii) credit costs on loans at 50bps (from 45bps) plus a 11bps bond impairment charge (or RM50m), (iii) NIM (at - 13bps (unchanged), and (iv) ROE of 7.6% (from 8.3%). Our FY21E assumptions; loans at +6%, credit charge at 0.41% and NIM at 4bps compression (taking into account of another rate cut translating to 4bps compression or RM22m erosion).

TP lowered but call maintained. TP lowered to RM2.90 (from RM3.45) based on FY21E PBV of 0.72x (from 0.76x) implying a -2SD below mean reflecting potential uncertainties in both domestic and external fronts. Still, dividend yield is exciting at >7% with the sharp downturn in share price. With potential total returns still >30%, and coupled with undemanding valuations, we maintain our OUTPERFORM

call.

Risks to our call: (i) lower-than-expected loans growth, (ii) steeper margin squeeze, (iii) higher-than-expected rise in credit charge, and (iv) further slowdown in capital market activities

Source: Kenanga Research - 2 Mar 2020