Review

• AMMB’s 1QFY25 net profit grew 32% YoY to RM500.2mn, underpinned by lower impairment charges and forward-looking provisions. Despite the encouraging YoY performance, results came within expectations, with net profit at 28% of our full-year estimate. The slight variance was due to the better-than-expected impairment charges. The group’s annualised ROE expanded to 10.2% vs 8.3% a year ago.

• Including Islamic Banking Operations, the 1QFY25 net interest income (NII) expanded by 6% YoY and 5% QoQ. The net interest margin (NIM) strengthened by 13 bps YoY and 10 bps QoQ to 1.89% due to easing funding costs while asset yields held steady.

• 1QFY25 loans slipped 1% YTD on softer Retail loans, such as Auto and Personal Financing. Meanwhile, Mortgage loans rose by a slight 1% YTD. Wholesale Banking contracted again by 8% due to large loan repayments, but loans in Business Banking remained healthy, rising by 2% YTD on the back of increased customer activity.

• Customer deposits declined by 5% YTD to RM135.5bn, with time/fixed deposit stable at RM89.7bn. CASA deposits also fell by 13% YTD to around RM45.8bn, translating to a CASA ratio of 33.8% vs 37.1% in 4QFY23. Management noted that the steep reduction in deposits aligns with its strategy to improve the cost of funds.

• Total non-NII declined by 19% YoY and 8% QoQ due to non-repeat of AmGen divestment gain and lower trading and securities gain, but this was partially offset by broad-based growth in flow business. By segment, the decline in non-NII from Wholesale Banking (WB) (-70% YoY) was cushioned by increases in Investment Banking (IB) (+9% YoY) and Retail Banking (RB) (+31% YoY).

• Yearly, overhead expenses rose by 3% YoY due to higher staff costs, sales & marketing, IT expenses, as well as admin & general expenses. QoQ overhead expenses declined by 2% to RM521mn. AMMB’s 1QFY25 costto-income (CTI) ratio climbed to 44.2% (1QFY24: 42.2%).

• AMMB reported net impairment amounting to RM12mn in 1QFY25 (vs RM190mn in 1QFY24) due to the write-back of forward-looking provisions and lower impairment charges. With that, the 1QFY25 gross credit cost (excl. recoveries) improved to 30 bps vs 73 bps a year ago. Including recoveries, AMMB’s net credit cost eased to 11 bps from 52 bps in 1QFY24. Despite the write-back, AMMB’s total overlay reserves stood at RM541mn.

• Elsewhere, the total gross impaired loans climbed to RM2,253mn in 1QFY25 vs RM2,139mn in 1QFY24, driven by RB and WB segments. AMMB’s gross impaired loans ratio (GIL) deteriorated slightly to 1.70% (1QFY24: 1.66%). The loan loss coverage ratio also reduced to 107.6%(1QFY24: 115.6%).
   
• Lastly, the CET1 and Total Capital Ratio stood at 13.2% and 16.5%, respectively. The liquidity position remains sound, with the Liquidity Coverage Ratio (LCR) at 167.9% (FY24: 164.6%).

Impact

• No change to our earnings estimates.

Outlook

• AMMB delivered a robust performance in 1Q, driven by an improvement in net interest margin (NIM). Asset quality remained solid, supported by sufficient loan loss coverage and overlay buffers. AMMB has successfully strengthened its balance sheet, which is evident by improving capital ratios, keeping AMMB on track to meet expectations, and potentially increasing its dividend payout. The planned divestment of its Life Insurance business and implementation of risk-weighted asset optimisation via the foundation internal rating-based (FIRB) approach is anticipated to enhance capital ratios further.

• Looking ahead, we expect FY25 earnings to be bolstered by a strong investment banking pipeline, a more stable NIM, moderate loan growth of approximately 5%, and continued provision write-backs. However, potential downside risks include weaker-than-expected corporate loan performance.

Valuation and Recommendation

• We update beta and lower our market risk premium from 6% to 5.5% for the banking sector on the back of the improving economic environment in Malaysia, the banking system’s healthy asset quality and capital ratios, stable interest rate environment and more positive investor sentiments. With that, we raise AMMB’s TP from RM4.74 to RM5.60. Our valuation is based on an implied PBV of c. 0.89x based on the Gordon Growth Model. With that, we upgrade AMMB from hold to BUY.

Source: TA Research - 21 Aug 2024