KUALA LUMPUR (March 8): RAM Rating Services Bhd (RAM Ratings) has downgraded the ratings of AMMB Holdings Bhd (AmBank) and its banking subsidiaries — AmBank (M) Bhd, AmBank Islamic Bhd and AmInvestment Bank Bhd — to AA3 from AA2 due to the RM2.83 billion global settlement related to 1Malaysia Development Bhd (1MDB).
“The outlook on the ratings is stable. All the entities’ short-term ratings have been reaffirmed at P1. The rating action is premised on the financial impact of the RM2.83 billion global settlement made by AMMB with the government of Malaysia in relation to its historical dealings with 1Malaysia Development Bhd,” according to a statement to its website dated March 5.
Equivalent to roughly two years’ net earnings, it said the substantial cost will reduce the group’s loss absorption capacity to withstand credit headwinds amid the Covid-19 pandemic.
“To be incurred in 4QFY21 (fourth quarter ending March 31, 2021), the provision for the settlement is estimated to erase 2.5 percentage points from AMMB’s common equity tier 1 capital ratio. This brings it to a pro forma 11.3% (adjusted to include 3QFY21 profit) — lower than its peers, although still comfortably above the regulatory minimum of 7%,” said RAM Ratings.
The agency said based on its prudent assumptions, it expects AmBank to take about two years to restore its capital to a level supportive of an AA2 rating.
It said the high degree of uncertainty over the ultimate impact of Covid-19 on banks’ loan portfolios — particularly when all relief measures end — may derail the expected time frame to replenish the group’s capital.
On the other hand, the planned divestments of AMMB’s stakes in its insurance units are credit positive as these may provide cumulative capital uplifts of 0.7 to 0.9 percentage point, said RAM Ratings.
It noted that these exercises had nonetheless not been taken into account given the uncertainty over their timing and eventual materialisation, adding that the decision not to propose any final dividends for the financial year ending March 31, 2021 (FY21) further reinforces the management’s strong commitment to capital restoration.
“The stable outlook on the ratings reflects our view that the AA3 rating has sufficient headroom to withstand potential challenges to the group’s credit metrics amid the ongoing Covid-19 pandemic.
“AMMB’s asset quality has been healthy pre-pandemic. As at end-December 2020, its gross impaired loan ratio stood at a low 1.73%, while the group’s provision coverage ratio was a strong 100% (with regulatory reserves). That said — as with other banks — loan defaults are likely to rise when forbearance measures are lifted, although the severity will depend on the strength and speed of the country’s economic recovery,” it said.
It said the group had judiciously built up its provisioning buffers on a pre-emptive basis over the past year and is anticipated to continue doing so in the coming quarters, albeit at lower levels.
“Notwithstanding the large settlement amount, the group has sufficient liquidity to meet the sum without impairing its funding and liquidity position. Its liquidity coverage ratio is at 156% and the net stable funding ratio of all its operating entities is above 100%,” it noted.
While the one-off payment will put AMMB’s full FY21 in the red, its pre-provision earnings growth has demonstrated good momentum, underpinned by a loan expansion of 7% year-on-year (y-o-y) and tight cost discipline in its recent nine-month results, according to RAM Ratings.
“We believe the group’s continuous enhancements to corporate governance by strengthening controls and processes over the last few years will sustain its franchise in the banking space,” it added.
At the time of writing today, shares in AMMB were unchanged at RM2.92, with some 4.03 million shares traded. This valued the group at RM8.8 billion.