Published on 18 Nov 2019.
RAM Ratings has reaffirmed AMMB Holdings Berhad’s (the Group) AA2/Stable/P1 corporate credit ratings. Notwithstanding the Group’s structural subordination as a non-operating holding company, the ratings are equated to those of its banking subsidiaries, reflecting its debt-free status at holding company level.
A mid-sized banking group, AMMB ranks sixth by total assets among its Malaysian peers. Given its double-digit annual expansion up to FY Mar 2019, the Group has been capturing market share in residential property mortgages and SMEs – segments where it used to be under-represented. On the other hand, AMMB’s auto loan portfolio continued to decline amid keen competition, weighing down its lending growth to 6% in FY Mar 2019.
At 1.7% as at end-June 2019, AMMB’s gross impaired-loan (GIL) ratio was healthier than some bigger peers’, despite being marginally above the industry average of 1.6%. In 1Q FY Mar 2020, a lumpy repayment largely counterbalanced the higher inflow of new impaired loans. Looking ahead, some slippage is likely amid the challenging business conditions and the seasoning of the Group’s mortgage portfolio, although we do not expect any major impact.
AMMB has been recording loan impairment writebacks since FY Mar 2015, thanks to strong recoveries. As the latter taper off, especially after the recent disposal of a portfolio of legacy written-off loans, net impairments will normalise albeit still deemed benign. As at end-June 2019, the Group’s GIL coverage ratio (inclusive of regulatory reserves) stood at a comfortable 105%.
The Group’s deposit-funding capabilities lag its peers’ in view of its high loans-to-deposits ratio of 97% as at end-June 2019, and a relatively low proportion (22%) of current and savings account deposits. Including other funding sources, the Group’s loans-to-funds ratio of 86% is more in line with its peers’. AMMB’s funding and liquidity positions are healthy, with a liquidity coverage ratio of 154%. All its banking subsidiaries had met the 100% requirement for the net stable funding ratio, which will become effective in July 2020.
In FY Mar 2019, AMMB’s core pre-tax profit (i.e. excluding expenses for a mutual separation scheme and gains on disposal of written-off loans) climbed up 8% to RM1.8 bil, driven by loan growth and cost reductions. However, the Group’s profitability was still moderate, with a core return on risk-weighted assets of 1.8% amid its relatively thin net interest margin (1.9%) and a still-high cost-to-income ratio (55%), despite some improvement. Further cost-saving initiatives will lend support to AMMB’s bottom line against a backdrop of tapering recoveries.
Relative to its risk profile, AMMB’s common equity tier-1 capital ratio of 11.9% as at end-June 2019 is deemed sound. The ratio does not take into account its unaudited profit in 1Q FY Mar 2020, which would have contributed another 0.4 percentage points. The Group’s capital position is adequately above the regulatory requirement even after considering the additional buffer that it may need to maintain under the framework for domestic systemically important banks.
Lim Yu Cheng, CFA, FRM
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Ratings on AMMB Holdings Berhad