A key focus area in yesterday meeting was on its lower-than-expected Day One Modification losses, which was mainly due to offsetting gains it will recognise from concessionary rate funding. This bodes well for AMMB, which was expected to be one of the more severely impacted banking groups, as well as for the sector. We maintain our RM3.60 TP and OUTPERFORM call. Valuations appear undemanding while earnings headwinds appear to be ebbing post aggressive pre-emptive loan provisioning in FY20 coupled with milder-than-expected modification losses.

AMMB held a meeting with sell-side analysts yesterday. We set out below the salient points from the meeting.

More colour on Day One Modification losses. AMMB shed more light with respect to its Day One Modification losses of RM80m guidance (vs. our earlier estimates of RM340m). As per AMMB, gross Day One Modification losses would have been RM400m, with the difference being modification gains from concessionary rate funding. According to AMMB, the group has a back-to back funding arrangement for the SME Special Relief Fund (SRF) loan programme, with about RM800m-RM900m in applications received. The funding AMMB receives is interest free while the SME loans will be loaned out at a concessionary rate of 3.5%, i.e. 20bps lower than the “benchmark” rate of a loan that is partly guaranteed. Thus, the interest savings between the soft loan it receives and the potential funding cost AMMB would bear if it were to seek funding from the market to fund these SME loans will be treated as a Day One modification gain. Note that there would also be a small Day One loss arising from the 20bps difference on the SME loans, which has already been included in the guidance above. After the Day One impact, NIMs should no longer be distorted. Recall that AMMB guided for FY21 NIM of 1.8% (FY20: 1.94%), supported by some FD repricing and assumed no further OPR cuts.

Staying more liquid, for now. RM65b (77% retail, 23% from business banking and SME) of loans are under moratorium, representing 60% of group loans. During the moratorium period, AMMB will forego RM6b worth of repayments. In anticipation of this, AMMB had boosted retail FDs (6-mth tenor) to provide some liquidity cover for the repayments foregone. In addition, management targets to keep LDR at <90% (FY20: 92%) during this period. We think this is a sensible move, notwithstanding that the excess liquidity AMMB plans to carry will be a drag on margins (already accounted for in the 1.8% NIM guidance above).

Corporate loan rescheduling & restructuring (R&R) cases have picked up, with these loans mainly relating to short-term trade loans (c. RM700m). AMMB has given a loan extension to these corporates and these loans will not be tagged as impaired during this period. No visibility as yet for the retail and SME segments, due to the moratorium.

Capital looks comfortable AMMB thinks a CET-1 ratio of 11.5-12% (FY20: 12.4%) should comfortably support BAU operations and absorb stressed parameters. Meanwhile, the move to FIRB could see a staggered release of RM900m in CET-1 capital (from mid-2021). The application has been submitted to BNM, but approval may be delayed due to the current situation.

A preview into 1HFY21. Loan base post 4QFY20 has been flat but treasury market gains have been robust in Apr and May, which will help support income growth. With opex under control, 1HFY21 PPOP could see single-digit growth. Gross loan impairment guidance remained at RM300m-RM500m for FY21. Recall that AMMB had made RM167m in pre-emptive loan allowances in 4QFY20, which forms part of the RM300m-RM500m provision expectation.

Maintain forecasts and TP of RM3.60, which is based on a GGM-derived CY21E PB of 0.55x. Even after we assumed AMMB takes a hit of c.RM1b in loan impairments over FY21-22, AMMB still trades at CY20E/21E PER and PB of 7.7x/7.3x and 0.48x/0.46x, respectively, which we think are undemanding. In the meantime, aggressive pre-emptive loan provisioning last quarter and milder-than-expected modification losses mean that headwinds for FY21 are easing. Maintain OUTPERFORM

Source: Kenanga Research - 2 Jul 2020