We hosted a meeting with ABMB’s Head of Investor Relations, Mr. Tan Hong Ian and came out with better clarity on the bank’s outlook post moratorium announcement. Although management keeps its FY21 guidance for now, we believe challenges could arise from prolonged movement controls, affecting demand for loans, and its asset quality. Following recent share price weakness, we upgrade our call to MP (from UP) with an unchanged GGM-derived PBV TP of RM2.20.

Better managed moratorium. Recall that the recent PEMULIH package reintroduced another 6-month blanket moratorium for loans, but with an opt-in basis as opposed to an automatic one which led to a FY21 modification loss of RM68m for ABMB. Management opined that with lessons learnt from the previous moratorium and ongoing assistance programs, they are positioned to better manage the enrolment process of any further applications. Further, given the new opt-in basis, management does not anticipate take-up to be as aggressive as last year. Also, the flexibility to amend financing terms would allow banks to land at fairer terms, hence reducing exposure to modification losses.

Meanwhile, the group’s current TRA profile is stable at 16% of its gross loans, which was mainly due to re-applications by past accounts offsetting overall rehabilitated accounts. We find comfort here as it possibly indicates that there is limited conversion of more accounts to be at-risk given the soft economic climate.

Guidance maintained for now… as management believes that its current measures are sufficient to capitalise on the eventual economy re-opening. That said, there are some headwinds in the 1QFY22 period (Apr-Jun 2021) owing to the implementation of tighter movement controls and the lockdown which affected loan applications and repayments. Meanwhile, the demand for household loans is still encouraging as consumers take advantage of the low interest rate environment. To recap, the group’s FY22 guidance are: (i) gross loans growth (3-4%); (ii) NIMs of c.2.35%; (iii) CIR 45-46%; (iv) net credit cost <90 bps; and (v) ROE >7.5%.

With regards to credit cost, management believes that the provided overlays from FY21 are sufficient in the current climate and they would be utilised them over the year. This should keep its credit cost exposure in check against unexpected delinquencies. On another note, to bolster its NOII performance amidst a softer trading environment, management remains focus on expanding its sustainable income streams (i.e. wealth management, fee-based products) to cushion potential softness in its treasury and investment arms.

…but we believe downward revisions are inevitable. As new Covid-19 cases are reported at unprecedented levels, we believe that prolonged movement controls would leave a mark on businesses as operating risks remain unfavourable. This is especially true for non-essential businesses. In our previous Banking sector note (29 Jun 2021), we toned down our sector-wide loans growth assumptions to 3-4% (from 4-5%) where we had also adjusted our assumption for ABMB’s CY21 growth to 3.7% from 4.5%. We believe the accelerated vaccination efforts would kick start the much needed economic recovery with more relaxed movement controls by 4QCY21 but will continue to observe the situation for now.

Post meeting, we leave our earnings assumptions unchanged for now.

Upgrade to MARKET PERFORM (from UNDERPERFORM) with an unchanged TP of RM2.20. Our TP is based on an unchanged GGM-derived CY22E PBV of 0.50x (1.5SD below mean). We believe the recent share price weakness has brought ABMB’s risk-to-reward profile to a more modest level. That said, given its moderate ROE performance against its peers and exposure to riskier assets, we recommend accumulating on further weakness when dividend yields become more attractive.

Risks to our call include: (i) higher/lower-than-expected margin squeeze, (ii) higher/lower-than-expected loans growth, (iii) better/worsethan-expected deterioration in asset quality, (iv) improvement/slowdown in capital market activities, (v) favourable/unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 12 Jul 2021