AMMB has been slapped a RM2.83bn fine by MoF for its past involvement in the 1MDB scandal. This is a huge negative surprise as it translates to 30% and 14% of AMMB’s market cap and book value respectively. That said, we do not expect a cash call as CET1 ratio is above BNM’s minimum requirement. However, there will not be any dividends in FY21. Overall, we cut FY21 bottom-line to a net loss of RM1.9bn and reduce FY22-23 profit by 7%. Downgrade to HOLD with a lower GGM-TP of RM2.95 (from RM4.05), based on 0.50x FY22 P/B. We note AMMB is run by a new management team and was doing well, on stronger footing, before this RM2.83bn fine came into the picture. We would turn buyers of the stock at the RM2.50-2.70 level (at -2SD).

NEWSBREAK

AMMB announced that it has agreed to pay a jaw-dropping RM2.83bn to the Ministry of Finance (MoF) to put to rest the bank’s past involvement in the 1MDB scandal.

HLIB’s VIEW

A sucker punch. This came as a huge negative surprise especially when we thought AMMB has laid the past behind them when they settled the RM54m fine by BNM back in 2015 (it was the largest imposed to any Malaysian financial institutions, until this ensued, eclipsing the central bank’s penalty by multiple folds). In addition, they spent an extra RM100m to improve its systems and processes to ensure better compliance. According to The Edge Weekly, the RM2.83bn was arrived at, based on a penalty of c.5x the RM600m profit generated from the quick flipping of 1MDB bonds; the hefty RM2.83bn settlement translates to 30% and 14% of AMMB’s market cap and book value respectively. As such, we anticipate a knee-jerk reaction to share price.

Financial impact. With a profit run-rate of RM1-1.5bn p.a., it would take 2-3 years for AMMB to recoup the RM2.83bn damage. In the immediate term, CET1 ratio will take a hit of 2.5ppt to 11% but still above the 7% BNM’s minimum requirement. Also, AMMB will be freezing FY21 dividends. In addition, the bank is planning to raise Tier 2 debt capital to improve balance sheet flexibility (which we see no harm as we are in a low interest rate climate) despite LCR and NSFR of >100%. That said, we do not expect a cash call from shareholders since it was in operation at 11% CET1 ratio back in 2016 and also paid dividends without needing this exercise.

Forecast. After factoring the RM2.83bn settlement into our financial model, we lower FY21 bottom-line to a net loss of RM1.9bn and also cut FY22-23 profit by 7%. In turn, FY21 book value will fall by 14% causing FY22-23 ROE to rise by 0.5ppt.

Downgrade to HOLD with lower GGM-TP of RM2.95 (from RM4.05), following our profit cut and based on 0.50x FY22 P/B (from 0.61x) with assumptions of 6.7% ROE (from 6.2%), 10.4% COE (from 8.3% to factor in higher risk premium), and 3.0% LTG. This is at -1.5SD of its 5-year mean P/B and below the sector’s 0.90x. The discount is fair given its falling ROE trend (2-3ppt lower vs 5-year & sector average). All said and done, 1MDB is a legacy issue. Currently, AMMB is run by a new management team and was doing well, on stronger footing, before this RM2.83bn MoF fine came into the picture. We would turn buyers of the stock at the RM2.50-2.70 level (at -2SD).

Source: Hong Leong Investment Bank Research - 8 Mar 2021