This article first appeared in The Edge Malaysia Weekly on July 26, 2021 - August 1, 2021

AMMB Holdings Bhd’s partial disposal of its general insurance business, a move that will help bump up its capital ratios, highlights what a growing number of banking groups are doing, that is, ceding stakes in their insurance business so that they can free up capital and focus instead on insurance distribution.

“Manufacturing insurance products is actually very capital intensive and often, the banks don’t really have the required expertise, so they’d rather do distribution which gives them a recurring income,” RHB Research analyst Fiona Leong explains.

This is the second such deal the industry has seen this year, while a third — RHB Bank Bhd’s planned sale of up to 94.7% of its stake in insurer RHB Insurance to Tokio Marine Asia Pte Ltd — was called off in December 2019 as the parties couldn’t agree on terms.

Last month, Affin Bank Bhd struck a deal with Italian insurer Generali that will see the latter taking stakes in AXA Affin Life Insurance Bhd and AXA Affin General Insurance, and buying the remaining 51% stake that it did not already own in MPI Generali Insurans, for about RM1.3 billion.

Will these spark more such insurance M&As within the banking sector? Most analysts are doubtful.

“I don’t think it will spur others to action in a ‘others are doing it, so let’s do it now’ kind of way. I think it is just coincidence that two deals happened this year. While the sector definitely has room for consolidation — there are a lot of insurance players — it’s hard to tell if more deals will come at this point in time, given that we’re in the middle of the Covid-19 pandemic and all,” Nomura Research banking analyst Tushar Mohata tells The Edge.

He also points out that, unlike AMMB, there is no pressing need for the other local banks to shore up their capital via the divestment of non-core assets like insurance.

In AMMB’s case, although the insurance divestment came as no surprise as it had been exploring a stake sale for several years now, it had more reason to sell now compared with previously.

“The push to divest has been accelerated following AMMB’s recent large RM2.83 billion settlement with the government [over legacy issues in relation to 1Malaysia Development Bhd] and the resulting erosion in its Common Equity Tier 1 (CET-1) capital,” Mohata says.

Be that as it may, this was no fire-sale deal as the group managed to fetch a price of about RM2.29 billion for the sale of AmGeneral Insurance Bhd (AGIB) to Liberty Insurance Bhd (LIB), which will be satisfied through a combination of cash and shares in LIB. This represents a price to book (PBV) of 1.4 times on AGIB’s book value of RM1.67 billion, which is “fair”, says Mohata.

Maybank Investment Bank Research notes that the PBV of 1.4 times is lower than that of historical M&As that ranged from 1.8 times to 2 times, but said that this was not surprising given that competition has heated up since the detariffication of the insurance industry and given that economic conditions have weakened.

“In fact, our sum-of-parts for Allianz Malaysia Bhd attaches a PBV of 1.5 times to Allianz General, which is presently the largest general insurer in Malaysia,” Maybank IB Research says in a recent report.

AMMB owns 51% of AmGeneral Holdings, which fully owns AGIB, while the remaining 49% stake is held by Australia’s largest general insurer, Insurance Australia Group Ltd .

For AMMB, the transaction will provide a needed boost to its CET-1 ratio, although analysts say the exact ratio is hard to ascertain now as the cash/share split for AMMB’s consideration has not yet been finalised. AMMB will be taking a 30% stake in the merged insurance entity.

AMMB’s CET-1 ratio, which fell to around 11% following the settlement with the government, rose again to about 11.7% after a private placement of shares, an exercise that was completed on April 14.

“At 11.7%, it is still near the lower end when compared with the other banks, but nevertheless well above the minimum required level [which differs for every bank]. I would say, given that AMMB is relatively small and not a D-SIB (Domestic Systematically Important Bank), and its business exposure is primarily in Malaysia, it doesn’t need to carry as much [capital] as the others. I think its counter-party banks and the rating agencies will be satisfied once it goes above 12%,” Mohata says.

“My own forecast, which was made before this insurance deal, is that AMMB’s CET-1 will reach 12.4% by the financial year ending March 31, 2022 (FY2022),” he adds.

He expects the group to resume paying dividends in FY2022, albeit at a lower payout ratio of 20%, before moving on to a payout ratio of 30% — the level at which AMMB previously used to pay — in FY2023 and FY2024. AMMB did not pay dividends in FY2021 given its RM2.83 billion settlement with the government.

Following the deal, AMMB will enter into a 20-year new bancassurance partnership with the new insurance group, which will end up becoming the country’s largest motor insurer and the second largest general insurer.

“Going forward, AMMB is likely to have a slightly lower earnings base, as its effective stake in the insurance business will be lower, and this will not be immediately offset by synergies from the combination with Liberty, in our view,” Mohata says in a July 20 report on AMMB. He has a “buy” on AMMB with a target price of RM3.40.

“We reiterate our ‘buy’ as we believe the bulk of the negative newsflow such as settlement, goodwill impairment and equity raising is now behind us,” he adds.

Meanwhile, CGS-CIMB Research maintained its “reduce” call and target price of RM2.63. “We are neutral on the deal as, despite the potential disposal gain, it will reduce AMMB’s general insurance earnings contributions in the longer term. We reiterate ‘reduce’ due to potential share price overhang following its private placement,” it says in a July 21 report.

As for Maybank IB, it maintained its “buy” and target price of RM3.50 on AMMB.

“AmGeneral contributes to about 11% of group earnings but with AMMB maintaining a 30% stake in the enlarged entity and with a banca agreement in place, we expect the loss in earnings to be less than 2%,” it says.

The stock, which fell 0.7% % since the deal was announced last Monday, closed at RM2.90 last Friday, giving it a market capitalisation of RM9.61 billion.  

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