Review

• AMMB reported a weaker set of 1QFY24 results, with net profit declining by 17.7% QoQ and 8.9% YoY to RM352.4mn. AMMB’s results almost fell short of expectations due to the weaker performance. Despite an increase in the overall operating income, net profit fell due to higher loan impairment. Annualised ROE slipped to 8.3% vs 9.8% a year ago.

• Including Islamic Banking Operations, the 1QFY24 net interest income (NII) declined by 3% YoY. Net interest margin (NIM) contracted by 8 bps QoQ and 36 bps YoY to 1.76% due to higher funding costs. Cushioning overall NII, loans grew by 7% YoY (-1% QoQ). The YoY growth was mostly supported by consistent growth in Retail loans, such as Mortgages, Cards and Auto Financing. Meanwhile, loan growth from Wholesale and Business Banking eased due to lower customer activities.

• Meanwhile, Customer deposits rose at a slightly stronger pace of 7% YoY to RM130.3bn (QoQ little changed), with Time/fixed deposit accelerating by some 11% YoY. CASA deposits remained steady at around RM39.6bn, translating to a CASA ratio of 30.4% vs 32.6% a year ago.

• Total non-NII widened by 20% QoQ and 36% YoY, underpinned by stronger Trading, Investment Banking and Insurance performance. Fee income strengthened by 12% YoY, driven by fees from portfolio management, unit trust management, and commission from bancassurance. QoQ, non-NII advanced by around 20% due to higher trading and investment income from the securities portfolio and an RM51mn gain from completing the AmGen divestment.

• Yearly, overhead expenses from continuing businesses rose by 8.4% YoY due to higher staff costs, sales & marketing expenses, as well as admin & general expenses. QoQ, overhead expenses declined to RM508mn due to ongoing disciplined cost management. On the back of positive JAWs, AMMB’s cost-to-income (CTI) ratio stood at 44.1% (1QFY23: 45.3%).

• AMMB reported net impairment amounting to RM190mn in 1QFY24 (vs RM64mn in 1QFY23) due to higher impairment charges in Retail and Business Banking. As such, the net credit cost (excl. overlays) rose to 52 bps vs 20 bps a year ago.

• Elsewhere, the total gross impaired loans climbed to RM2,139mn in 1QFY24 vs RM1,864mn in 1QFY23, driven by Retail and Business banking segments. With that, AMMB’s gross impaired loans ratio (GIL) broadened to 1.66% (1QFY23: 1.55%), while the loan loss coverage ratio slipped to 115.6% (1QFY23: 123.3%).

• Lastly, the financial holding company’s (FHC) CET1 and Total Capital Ratio improved to 12.6% and 16.3%. The liquidity position remains sound, with the FHC’s Liquidity Coverage Ratio (LCR) at 170% (FY23: 149.2%).

Impact

• We readjusted our credit charge assumption higher and lowered overhead expenses to align with the 1Q results performance. Taken together, we trimmed AMMB’s FY24/25/26 net profit to RM1,707.0/1,883.4/2,114.8mn from RM1,799.6/1,891.2/2,047.9mn.

Outlook

• Management continues to foresee FY24 earnings to be supported by: 1) a solid IB pipeline, 2) a more stable NIM for the remaining part of the year, 3) moderate loan growth of 4-5% and 4) a credit charge guidance of c. 35 bps despite an increase in GIL for the Retail and Business Banking segments in 1Q.

Valuation and Recommendation

• We lowered the sector’s market risk premium assumption to 6.0% from 6.5% on the back of an improved domestic political climate. As such, despite the slight downward revision to our forecast, we raised AMMB’s TP to RM4.30 from RM4.00. Our valuation is based on an implied PBV of c. 0.73x based on the Gordon Growth Model. BUY reiterated on AMMB.

Source: TA Research - 22 Aug 2023