2QFY21 results missed estimates, as AMMB warned of elevated loan provisions in 2HFY21. FY21E credit cost could now end up at 85-100bps (1HFY21: 74bps, annualised) due to uncertainties surrounding the strength of the economic recovery, outcome of specific syndicated loan restructurings and early signs that some borrowers coming out of moratorium have started to fall behind in repayments. The implication of the latter could be a bigger concern, in our view, especially if this becomes more widespread. While still early days, we think investors should take some chips off the table and downgrade our call to MARKET PERFORM from OUTPERFORM, with a revised TP of RM3.70.

2QFY21 results missed estimates. 2QFY21 PATMI softened 35% QoQ (-26% YoY), which brought 1HFY21 net profit to RM602m (-15% YoY). Although 1HFY21 PATMI forms 52% of our and consensus FY21E PATMI, we consider the results to be below expectations given a higher-than-expected credit cost AMMB is now guiding, which implies a weaker 2HFY21, HoH.

Results’ review. 2QFY21 pre-tax profit was down 41% QoQ, inclusive of 1QFY21’s modification losses. The key factor underpinning the softer earnings was higher loan impairments, which surged 564% QoQ, translating to a credit cost of 126bps (1QFY21: 19bps). Out of the RM343m net provision in 2QFY21, overlays accounted for RM205m (60%) (vs 1QFY21: RM10m; 4QFY20: RM167m). Based on the retail R&R take-up (details below), overlays were made assuming all borrowers on repayment holiday will be staged one notch down, and 50% of borrowers under the reduced repayment programme gets downgraded a stage. On top of that, management made overlays for a couple of O&G names amounting to RM25m (part of the RM205m).

This aside, pre-impairment profit was up 19% QoQ thanks to uptick in loan growth (SME and retail) and NIM expansion from lower funding cost, partly offset by weaker NoII (-14% QoQ) mainly on lower trading gains. Asset quality was largely stable but with the higher loan impairments, LLC improved to 96% from 71% in 1QFY21. Notably, AMMB wrote back its regulatory reserves (1QFY21: RM382m) during the quarter, which, together with the absence of interim dividend, further shored up CET-1 ratio to 13.5% (+100bps QoQ).

Conference call’s highlights. Total R&R loans stood at RM12b or 11% of gross loans with the retail/business banking/corporate mix being 42%/27%/31%, respectively. AMMB also shared that the size of its B40 exposure was RM10b, based on internal database. As highlighted above, the main negative surprise was the high credit cost that AMMB guided. Some factors management had taken into account are: (i) uncertainties over the strength of the economic rebound given another wave of the pandemic, (ii) uncertainties over the outcome of certain aviation and O&G accounts that are being restructured, and (iii) early signs of repayment slippage for some loans coming out of the automatic moratorium. Apart from the above, management guided for full-year loan growth of 5-6% and NIM to stabilise at current levels, assuming no OPR cut in Jan 2021.

Earnings. We cut FY21E PATMI by 16% as we raised our credit cost assumption to 75bps (from 45bps). Our FY22E credit cost is largely unchanged for now (44bps vs 46bps previously), as we await further updates from AMMB.

TP revised to RM3.70 (from RM3.60), but recommendation downgraded to MARKET PERFORM from OUTPERFORM. Our GGM-derived target CY21E PBV has been raised to 0.56x from 0.54x after we incorporate a lower risk-free rate assumption of 2.7% (from 3.0%). While still early days, we think the rising days-past-due (DPD) loan trends could stoke investors’ concerns. Coupled with the recent share price action, we are downgrading our recommendation to MARKET PERFORM from OUTPERFORM. While valuations look attractive, we expect share price to take a breather until a clearer picture on asset quality is available.

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

Source: Kenanga Research - 1 Dec 2020