AMMB made a good start to FY21, with 1QFY21 CNP making up 32% each of our and consensus FY21 estimates as higher NoII and benign credit cost more than offset the impact of modification losses. Nevertheless, we consider the results as in line given that treasury gains may moderate ahead while AMMB guided for a rise in credit cost as a clearer picture on asset quality emerges. We maintain our RM3.60 TP and OUTPERFORM call. Valuations appear undemanding while aggressive pre-emptive loan provisioning made is positive for a clearer path to earnings recovery.

Strong treasury income and lower credit cost cover modification losses. AMMB enjoyed a strong start to the year with 1QFY21 reported net profit of RM365m (-7% YoY/+48% QoQ) making up 32% of our/consensus FY21 estimates. Although modification losses of RM58m was incurred, this was more than compensated by robust NoII (+26% YoY/+148% QoQ) from trading and investment gains and benign credit cost of just 19bps (4QFY20: 75bps; 1QFY20: -12bps) as lower macro provisions of RM10m were booked in during the quarter vs. 4QFY20 of RM167m.

Results’ review. Ex-modification losses, we estimate that 1QFY21 pre tax profit was flat YoY but surged 97% QoQ due to the abovementioned reasons on NoII and credit cost. Even after realising strong trading gains, we note that AMMB’s investment revaluation reserves rose further to RM877m from RM635m in FY20. NIM slipped 21bps QoQ to 1.74% following the 100bps OPR cut in 1HCY20, cushioned by lower funding cost. 1Q modification loss adds another 15bps compression to NIM. Loan growth was a decent 7% YoY (flat QoQ), led by the corporate and SME segments while deposits rose 11%/1% YoY/QoQ as AMMB looked to build up liquidity. More impressive was CASA growth (+33% YoY/+6% QoQ) due to the moratorium. With that, although 1QFY21 average funding cost was 2.62%, AMMB said that July’s funding cost is down to 2.23% thanks to the CASA growth and repricing of fixed deposits. Other than that, balance sheet looks to be in good shape with: (i) asset quality stable (GIL ratio of 1.7%) while LLC ticked up to 71% (4QFY20: 68%); (ii) strong liquidity buffers with LCR at 161%; and (iii) CET-1 ratio of 12.5%.

Conference call’s highlights. An estimated 56% of the loan book or RM60b is currently under moratorium. Of this amount, AMMB thinks RM15b (RM14b for individuals and RM1b for SME) may require further assistance post moratorium. Although additional modification losses will need to be incurred for these loans that require further support, we do not expect the quantum to be as significant as the recent loss. AMMB also highlighted that banks are presently in discussions with the auditors and BNM as to whether and when these loans that receive targeted assistance will need to be staged, which, in turn would impact the timing of loan provisioning. Hence, AMMB was not able to provide more details on the outlook for asset quality and credit cost at this juncture but mentioned to expect higher credit cost ahead. AMMB still guides for potential RM300m-RM500m in loan provisions for the vulnerable segments (c. 28-47bps credit cost), of which, RM177m had been taken up in 4QFY20 and 1QFY21. There may be upside risk to the amount, depending on the operating environment. Finally, NIM guidance remains at 1.8%, but this does not take into account any further rate cuts (RM30m impact to NII for every 25bps OPR cut).

Earnings. No change to our earnings forecasts at this stage.

Maintain OUTPERFORM 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 CY21E PE and PB of 7.2x and 0.46x, respectively, which we think are undemanding. In addition, the stock is down 22% YTD and has lagged peers. We see the stock as an attractive catch-up play.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) weaker-than-expected market-related income, and (iv) higher-than-expected rise in credit charge.

Source: Kenanga Research - 27 Aug 2020