RAM Ratings reaffirms AMMBâ€™s AA3/Stable/P1 ratings
RAM Ratings has reaffirmed the AA3/Stable/P1 corporate credit ratings of AMMB Holdings Berhad (the Group), Malaysia.
The long-term rating incorporates a 1-notch differential from the Group’s AA2-rated subsidiaries, to reflect AMMB’s structural subordination as a non-operating financial-holding company as well as its comfortable company-level gearing and double-leverage ratios. At the same time, the respective ratings of the Senior and Subordinated Notes under the Group’s RM 2 billion MTN Programme (2012/2042) have been reaffirmed at AA3/Stable and A1/Stable. We have also reaffirmed the A1/Stable rating of AMMB’s Proposed Subordinated Notes Programme of up to RM 10 billion (Sub-Notes Programme).
Notably, AMMB’s asset quality remains sound; its gross impaired loans (GIL) had eased to 1.6 per cent of its total lending as at end-September 2016 – better than the industry average of 1.7 per cent. This was underpinned by the write-off of a lumpy impaired loan in the manufacturing sector. The Group’s diversifying and de-risking strategy in the last few years has also helped to improve its asset quality. Given the more subdued economic landscape and the lingering concerns about asset quality for the real estate (non-residential property) as well as oil and gas sectors, the Group’s GIL ratio may inch up in the near term. That said, we do not expect it to deteriorate beyond two per cent – a level which is still commensurate with its current ratings.
Meanwhile, the ratings also take into account AMMB’s healthy capitalisation levels. As at end-September 2016, the Group’s fully loaded common-equity tier-1 ratio stood at 11.2 per cent. At company level, its gearing and double-leverage ratios were kept comfortable at a respective 0.14 and 1.13 times.
The strengths above are, nonetheless, offset by the Group’s relatively weak funding position. Its loans-to-deposits ratio (LDR) had spiked up to 103.4 per cent as at end-September 2016. This is the highest among its peers (industry average: 88.0 per cent) and highlights the stiff competition for deposits amid a tighter funding market, as well as AMMB’s poorer deposit franchise compared to its larger peers. That said, the Group’s banking subsidiaries kept their average Basel III liquidity coverage ratios at relatively strong levels of 130 per cent-160 per cent in 1H FY Mar 2017 (industry average: 129 per cent as at end-September 2016). The Group has also diversified its funding sources through the issuance of longer-dated debt securities over the years. Its increased focus on SME including payroll and cash management as well as merchant business are expected to help in building up its deposit base.
AMMB’s profitability indicators have been under pressure in recent times, weighed down by the compression of its net interest margin and exacerbated by the contraction of its loan base. The various changes in the Group’s senior management team in the past two financial years may have also impacted its growth trajectory. While the new line-up has given some clarity on the Group’s strategic direction and growth focus, RAM Ratings believes that it will undergo a transitory period before business momentum gathers pace. The Group’s profit growth is expected to remain muted in the short term, especially amid the subdued economic environment.
While Australia and New Zealand Banking Group Limited (better known as ANZ) still has an influence over AMMB’s strategic direction through board representation and senior management appointments, it may be looking at selling down its stake. The uncertainties over the potential exit of ANZ may change the business dynamics and strategies of the Group. We will continue monitoring the developments on this front.