AMMB to face material impact on 1MDB settlement

The bank has adequate capital buffers to absorb the global settlement without the need to raise additional equity capital


AMMB Holdings Bhd share prices showed resilience, falling 36 sen or 11.39% on resumption of trade yesterday, on the back of the banking group agreeing to pay RM2.83 billion in settlement over its role in the 1Malaysia Development Bhd (1MDB) corruption scandal.

The stock hit a low of RM2.63 and high of RM2.91 in intraday trade as investors priced in the likely impact from the fine.

Maybank Investment Bank Bhd (Maybank IB) maintains its ‘Hold’ call on AMMB, noting that the settlement will impact the company’s earnings for the financial year 2021 (FY21), but to a limited degree as it has adequate capital and intact fundamentals, and its impact on earnings is one-off. The investment bank has a target price of RM3.40 on AMMB.

“Management continues to guide for credit cost of 80 basis points (bps)-100bps for FY21, which implies higher provisions in the fourth quarter (4Q21) for the retail and oil and gas book,” it said in a note yesterday.

Maybank IB expects a material impact on AMMB’s 4Q earnings and consequently the entire year, but noted that the bank has the adequate capital buffers to absorb the global settlement without an immediate need to raise additional equity capital. As a result, AMMB will not be proposing any final dividend for the financial year.

Maybank IB noted that there are additional costs such as legal fees to be incurred and the cost-to-income ratio is expected to be higher at 49% in 4Q21 (48% in 9MFY21), while net order imbalance indicator (NOII) is estimated to be lower quarter-on-quarter.

“Our FY21 forecast factors in the RM2.83 billion settlement (core earnings unchanged) and we have assumed no dividend payment for FY21 and FY22 for now,” it said.

AMMB released its quarterly results on Monday for 3Q21 ended Dec 31, 2020, posting a total income of RM3.42 billion for the year-to-date (YTD) period, on higher net interest income, and trading and investment income.

According to Maybank IB, AMMB’s earnings for the quarter at RM264 million was lower by 31% year-on-year (YoY), which took the YTD’s core net profit to RM918 million, 16% lower YoY.

“The results were above both our expectations and consensus, principally because of higher than expected NOII and lower than expected provisions during the quarter,” it said.

With the company’s common equity tier 1 (CET1) ratio at 13.5% as of end-December 2020, the number is expected to decline to 11% once the global settlement is factored in by 4Q.

“In the pipeline, however, would be the implementation of the internal risk-based approach from April 2021 which would add about RM800 million to RM1 billion to CET1 and potential asset divestments that would add RM800 million to RM1 billion to CET1 as well.

“Assuming RM800 million each, we estimate this would take AMMB’s CET1 back up to 12.4% on a proforma basis, which is comfortable, in our view,” it said.

During the results announcement, AMMB group CEO Datuk Sulaiman Mohd Tahir said the group’s focus to accelerate its digitisation initiatives when it kicked off the previous Top 4 strategy has proven to be beneficial with an added advantage.

“We continue to reinforce our digitisation agenda to deliver cost efficiencies and to improve end-to-end solutions for customers.

“At the same time, the group remains resolute in fortifying its fundamentals in terms of productivity, risk management and balance sheet strength to meet the challenges of the coming year,” he said.