News

AMMB entered into a conditional share sale agreement (following BNM approval in Apr 14) with MetLife for the latter to acquire 50% plus 1 share in AmLife and 50% less 1 share in AmTakaful for RM812m cash (RM740m and RM72m, respectively). The agreement also involves a 20-year exclusive distribution agreement for the group to distribute AmLife and AmTakaful products.

This is not new as it has already made the announcement back in Dec 13. Yesterday’s announcement was to formalize the strategic partnership with the terms and consideration largely unchanged.

Financial impact

Based on AMMB’s cost of investment and book value of RM204.6m and RM54.5m in the referred stakes of AmLife and AmTakaful, it will make a gain of RM552.9m (which will boost its capital ratios by circa 70bps) but we consider this as non-core. It also works out to 3.6x and 1.3x P/B for AmLife and AmTakaful, respectively.

By annualizing AmLife and AmTakaful 6MFY03/12 accounts (RM20.9m profit and RM2.3m loss, respectively) and assuming 4% interest from the proceeds, AMMB’s FY15 earnings could be boosted by circa 1.2%, marginal.

Pros / Cons

The insurance arm contributed circa 12.7% to the group’s 9MFY03/14 net profit but bulk of it came from the general insurance business while the life insurance arm is still in the early stage of growth (especially the Takaful business which only started in 2012 vs. normal gestation period of 5-years).

With the credentials of MetLife, we are long-term positive about the deal given that, immediate financial impact aside, the new entity will be a more formidable force in a market that is dominated by large players (mostly foreign-owned). It could potentially boost contributions from the life business (as well as fees from selling the products through the bank’s branches) over the longer term. The tie-up is also complementary as products competency is match with distribution capability.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and impact from lower capital markets activities.

Forecasts

Unchanged.

Rating

HOLD

Positives – Value propositions from ANZ have improved asset quality, risk management and competitiveness. Improving ROE and higher dividend guidance as well as focus on profitable growth are bearing fruits. Recent mergers and life insurance partnership to enhance recurring non-interest income over longer term.

Negatives – High LD ratio and relatively high earnings sensitivity to capital markets.

Valuation

Maintain Hold and target price of RM7.83 based on Gordon Growth (ROE of 14.6% and WACC of 11.3%).

Source: Hong Leong Investment Bank Research - 29 Apr 2014