RM2.83 billion global settlement should resolve AMMB’s 1MDB legacy issues

02 Mar 2021 / 22:49 H.

PETALING JAYA: AMMB Holdings Bhd’s global settlement of RM2.83 billion with the Ministry of Finance (MOF) announced last Friday should resolve all legacy issues related to 1Malaysia Development Bhd that the financial group has with the government and its agencies, including the Securities Commission and Bank Negara Malaysia.

In a note following the group’s analyst briefing on Monday, KAF Research said this should also unconditionally discharge AMMB from any further legal pursuits by the government of Malaysia.

To recap, AMMB’s agreement with MOF for a sum of RM2.83 billion is to be paid towards the full and final settlement in relation to all transactions involving 1MDB and its related entities.

“AMMB indicated that it was made aware of this potential issue only within days prior to the announcement on Feb 26. Further, it was only made aware of the amount of global settlement hours before the release of the announcement in the evening. The intention of the settlement is to settle outstanding matters relating to 1MDB once and for all.

“AMMB also hinted that if there had been further legal pursuits by other authorities, they would have likely reached out first to the Malaysian government and AMMB would have been made aware of any such actions. At this point it had not been made aware of any further action by other foreign authorities,” the note added.

As a result of the settlement, AMMB has said, a material impact is expected for its fourth quarter ending March 31, as a provision for the full amount of RM2.83 billion will be reflected. However, the group’s third quarter net earnings were also impacted by macro provisions, as a proactive measures arising from the Covid-19 pandemic.

Its net profit for the third quarter ended Dec 31, 2020 fell 31% to RM263.83 million from RM382.15 million a year ago on macro provisions of RM59.7 million, as revenue dropped 11.8% to RM2.09 billion from RM2.37 billion.

For the nine-month period (9M’21), AMMB’s net profit fell 20.8% to RM866.32 million from RM1.09 billion in the same period last year. Revenue dropped 9.4% to RM6.44 billion from RM7.11 billion.

The group posted a net impairment charge of RM644.5 million in 9M’21, against RM133.5 million a year ago, due mainly to macro provisions of RM274.5 million.

The total pre-emptive macro provisions to-date amounted to RM441.8 million and were made in relation to the group’s exposure to retail and SME customers affected by the Covid-19 pandemic as well as the aviation and oil and gas sectors. Gross impaired loan ratio remained at 1.73% (FY20: 1.73%) as the group closely monitors its credit portfolio and proactively reschedules and restructures vulnerable loans.

AmBank group CEO Datuk Sulaiman Mohd Tahir said while the settlement will undoubtedly have a material impact on the group’s Q4’21 earnings and consequently FY21 results, it is important to note that it has adequate capital buffers to absorb the global settlement without an immediate need to raise additional equity capital.

There are, however, plans to raise Tier 2 debt capital to increase total capital available for on-going working capital.

“However, as a consequence of the global settlement, the group will not be proposing any final dividends for FY21. We remain financially resilient and are ready to capitalise on the opportunities ahead with our refreshed Focus 8 strategy,“ he said in a statement.

The group’s liquidity coverage ratio stood at 155.8%, with all banking subsidiaries registered a net stable funding ratio4 of above 100% as at Dec 31, 2020.

At the same time, core equity Tier 1 (CET1) ratio and total capital ratio (TCR) strengthened to 13.5% and 16.4% respectively from capital accretion through profit formation and the adoption of transitional arrangements introduced by the regulator.

As of Dec 31, 2020 the estimated proforma impact to CET1 and TCR ratio is estimated to be reduced from 13.52% to 11.01%; and 16.39% to 13.88%, respectively after the proposed provision for the global settlement.

CGS-CIMB said AMMB’s 1MDB settlement with MOF is a negative surprise as AMMB had not disclosed any discussions previously.

Factoring in the RM2.83 billion 1MDB settlement, the research house is now forecasting a net loss of RM2 billion in FY21 versus its net profit forecast of RM829.6 million previously.

“We downgrade AMMB from an add to reduce as we believe the stock would be clouded by the negative sentiment in the near term due to the 1MDB settlement. Potential derating catalysts include a net loss and the absence of dividends in FY21F, caused by the 1MDB settlement,“ said CGS-CIMB.

KAF Research, however, is maintaining its ‘buy’ call on AMMB, as its latest briefing should reassure investors as it affirmed that there is unlikely to be any further investigation.

“Share trading has been suspended for two days, on March 1 and 2. We expect a knee-jerk reaction downwards to the share price, given that this news is totally unexpected. However, we would look to buy on weakness once the share price stabilises, as this looks to be a one-off event and, more importantly, implies there should be no further future investigation on AMMB.”

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