This article first appeared in The Edge Malaysia Weekly on August 28, 2017 - September 3, 2017

THERE has been much speculation as to why AMMB Holdings Bhd and RHB Bank Bhd failed to agree on a merger after almost three months of discussions. In particular, there was talk that it was because of potential risks that AMMB faced on issues related to 1Malaysia Development Bhd (1MDB). In an exclusive interview with Adeline Paul Raj last Friday, AMMB group CEO Datuk Sulaiman Mohd Tahir insists there is no truth to this.

The Edge: The view out there is that AMMB needed this merger more than RHB.

Datuk Sulaiman Mohd Tahir: Not really. The invitation to [discuss] a merger came from RHB. The suggestion was, ‘why don’t we sit down, and kind of have a look and see if we’re interested to partner’. The whole idea was to explore. And for us, to explore means we looked at it as an opportunity because the whole idea was to go into it as a merger of equals. Yes, we may be slightly smaller, RHB is bigger, but the intention was, how can we combine forces. That’s why things like price-to-book (P/B) equals to one [but] if you want to buy or take over, you’ve got to pay a premium. It’s not free, right. [If] you can pay up, the shareholders will sell. But the shareholders would only be willing to sell, at this so-called one-to-one (book value), provided it is a merger of combined forces. That was the intention.

As you know, banks are highly regulated, so both of us went to Bank Negara Malaysia [for permission to] sit down and have a discussion. And so we [talked] for about three months.

In any merger of equals, where we need to make sure that our shareholders are properly compensated, there are always discussions about terms and condtions (T&C). And sometimes, the T&C may be acceptable to us but not acceptable to RHB, and vice versa.

We felt the T&C were not suitable for us — it could be valuations, process, systems, people. As bold as we are in wanting to discuss a potential partnership, it’s also [about being] bold enough to make a call and to say no if we don’t want it.

[In the end] both of us decided and said ‘it looks like we’re not such a good fit’, so maybe we’ll move on.

We thought having discussions about a merger would be interesting. For RHB, the merger would solidify its position in Malaysia. If you take out Singapore, Indonesia and all its other overseas branches, and combine their local business with us — our business is all local — we could have been [a] top three bank. (Note: the No 3 bank now is Public Bank Bhd.) So for RHB, it’s very good because its solidifies its position here, and because of that, we see revenue synergies.

And for AMMB, it’s a chance to access some of the regional markets. And also, our fund management is much bigger than RHB’s. Combined, we’re No 1. In some areas, such as the insurance business, we’re much bigger than RHB. If combined, we can become No 1. And in investment banking, we are much stronger than RHB, but if we combine, there’s a lot more we can do. There’s potential synergy upside.

And because of that, we said, if we talk and we do it, it can be good for the both of us. But then again — fundamentals. In terms of exchange ratios, valuations, systems, processes and people, we need to make a call. And we find that certain things are not acceptable to us because ... RHB is a long-standing old bank, and we are also a long-standing old bank, and then we do the evaluation, yes, the key is also in the execution, it’s not just about combining assets — sometimes you combine but you don’t have that fit, so you may lose the business rather than gain it, so ...

Datuk, were you there during all the merger discussions?

It was a team effort and yes, I was there as the principal driver of the merger discussions.

You’re saying the collapse was due to disagreements over valuations, T&C and so on. What exactly led to the collapse?

You know, we have an agreement that says you should not disclose the exact terms of our discussions. It’s about us laying the terms on the table, RHB laying down the terms, and making that call at the end of the day. And we were all very professional about it. We say, ‘okay, these are the things we want to look at, these are the things we want to agree on, these are the principle terms that we want’.

It’s just like getting married, right? You kind of go and see whether you like the person, the character, and you sit down for three months and then realise that it is not a good fit. It doesn’t fit my profile, my plans. The focus is a bit different from mine, and because of all these, then maybe we shouldn’t merge.

But from what we gather, as at the week before, it seemed like things were going well. And then suddenly ...

I always say, discussions are always positive because we’ve still not made a decision. As long as there’s discussion, you’re still interested. And we did have a period until end-August to make a call. We both agreed that by end- August, we should make a decision. Because we also know that protracted discussions on mergers can be quite energy-sapping and waste a lot of resources — because we would have to delay projects, delay hiring and so on. So, because of that, we decided that the closure is end-August. For exclusive negotiations we were only given (by Bank Negara) up to end-August.

So it was the Employees Provident Fund that proposed this merger?

No, it was RHB Bank who approached us and asked if we were interested to enter into a discussion. I’m sure they cleared it first with their shareholders. And for me, then I have to clear it with my shareholders, my directors — are we interested or not to [talk] with them? And they said, ‘Yes, we’re interested to discuss, let’s see. Let’s open our books and let’s see theirs, let’s have a discussion.’

We hear talk that the central bank might have had a hand in trying to bring the two banks together?

No, it was a commercial decision. As far as I’m concerned, it’s commercial — meaning that the central bank says, ‘since you two are very interested to find areas of synergy, we are happy to say, okay, commence that discussion’. I don’t think there was any force or persuasion.

Of course, the central bank can say it’s good for banks to be merged. But that’s beside the point. The point is, it’s got to fit.

That is why the stories go around (that Bank Negara wanted the merger), I don’t understand how they came up. As far as I’m concerned, it was a commercial decision. The central bank had nothing to do with it. We went to them for approval for discussions. And when we decided to ‘break up’ as well, they didn’t come in to patch us up or anything like that.

Can you give us more on what went wrong? Because there’s so much talk out there ...

Meaning what, the contingent liabilities? Let me give you data from our latest results. Clause B9, page 64, says, ‘The Group and the Company do not have any material litigation which would materially affect the financial position of the Group and the Company. (For other litigations, please refer to Note A3).’

That’s a judgment call from the board?

Nope, these are finalised numbers, and have been submitted to the regulators, and this is as at June 30, 2017, my Q1. The same is repeated in my audited accounts.

But perhaps the concern, Datuk, is of a potential liability that may appear in the future. Not one that already exists in your accounts.

If I don’t have something on my table now, and nothing that can be quantified, then clearly it’s not a matter for concern. We, as a bank, we always review risk — for example, business continuity,  planning for cyberattacks. Would I price in a cyberattack into contingent liabilities? It wouldn’t make sense.

As far as I’m concerned, as of today, there is nothing on the table [that could be a potential contingent liability].

Does AMMB have contingent liability exposure relating to 1MDB?

You look at my contingent liability. My contingent liability comprises three things. No 1 is bank guarantees. BGs are utilised for utility security deposits. And my BGs are normally cashback.

The next BGs I have are what you call the performance bonds and bids. Because we’re a kind of a corporate bank and there are lots of projects out there — MRT, government projects and so on — so, when a contractor wants to go for a job, they have to have a bid bond. Then you have a performance bond — meaning that, once the contractor gets the job, then I have to give a performance bond. This is normal banking practice. Sometimes [in] the contract, they give you an advance, so for that advance, they want a guarantee from a bank to make sure that the project is completed. In any contract financing that we do, these are standard requirements — be it MRT, be it housing development and so on.

The other ones are letters of credit — meaning that you want to import goods from overseas, an LC will be issued.

So, these are my contingents. Some banks’ contingents are RM4 billion, some RM5 billion — the big banks could [have] RM30 billion to RM40 billion outstanding in contingents, which is normal. And that is a function of the credit we underwrite on the customer. For example, I give a customer RM100 million — so it could be RM80 million in the form of revolving credit (that means funded lines, overdrafts) and RM20 million in the form of guarantees, that is bid bonds, standard bid bonds, performance guarantees. And normally we time it until the period of completion of the project. So that’s what my contingents are.

In my books, actually in most commercial banks’ books, like us, they would have a contingent. And that contingent is solely on the behalf of customers.

So, as it stands now, the total amount of contingent liabilities you have is ...?

It is between RM7 billion and RM8 billion and it changes over time. And if you look at the bigger banks today, maybe about RM30 billion to RM40 billion. It’s quite normal.

These are secured, right?

Secured, but depending on the customer risk profile. This contingent means that in the event the contractor fails, for example, then I have to do the pay-up.

These are normal contingent liabilities. They are nothing to be concerned about.

So that’s why, I’m a bit perplexed when people talk about us and contingents. What contingents? Look at my books! I’m open. I submit [them] to Bank Negara.

So that’s why, this contingent talk that came about ... if you’re talking about 1MDB, DoJ [US Department of Justice] and things reported in the US press ... I’ve got nothing on my table, as far as I’m concerned. And in our merger discussions, we never talked about this. It’s more about the T&C, and the question of whether it was viable or not.

The fear out there is that you may have nothing now, but ...

Are you waiting for an earthquake or something? You want me to provide for an earthquake? (laughs)

People may be concerned about an ‘earthquake’ of sorts. Ever since you two started merger talks, there has been more press coverage on the DoJ’s escalating probe into 1MDB. So maybe the fear is that there could be fallout for AMMB later. And AmBank and a specific bank account are mentioned in the DoJ’s civil suit. So, we ask again, does AMMB have contingent liability exposure relating to 1MDB?

No.

You’re confident about that?

Yes.

And can you confirm whether this had anything to do with the talks being called off?

No, as far as I’m concerned, it had nothing to do with it. I don’t know what RHB’s thoughts are, but as far as I know, it had nothing to do with it. Because we never talked about this.

It never came up during the discussions?

No. We talked about valuations, T&C and so on.

There’s talk that RHB maybe tried to seek a guarantee that there would not be any action taken against AMMB by the US.

No. Absolutely not.

So you’re going on the record to say these talks were not called off because of fears of a fallout on AMMB relating to 1MDB?

Yes. I can say that.

What about ANZ, were they closely involved in the discussions?

They were very much involved.

So what now for them?

If it’s not a good deal, they walk out. They were okay with [walking out]. But of course, their strategy in the long term is to exit Asia. That has been their plan. But it doesn’t mean they’re going to sell out just like that.

So what now for the two shareholders that want to exit?

So they will wait for when the time comes, if they want to. I don’t think they’re in a hurry, and ANZ also has done their revaluation of the books, and when the time is right they’ll find partners. If they don’t, then they’ll continue to support the bank.

Has the board been able to come together and decide what to do now?

We’ve always been clear about what we want to do, with or without the merger. Of course, the merger will escalate some of things we want to do. But even without the merger, there’s always been a plan to build the bank.

Can we talk about your exposure to the property sector. When we speak to analysts, there is concern because you are quite exposed to some potentially problematic property developers.

If you look at my portfolio, I’ve got RM1.7 billion worth of non-performing loans [NPL] as at June 30. About RM1 billion comes from the corporate sector, and out of that, 70% would be the property sector. I would say the good thing about property sector loans is that they are well-collateralised, my margins are very low — meaning that I will be able to sell the building for a heavily discounted price, I can get my money back, so I’m not so worried. But, banks being banks, we’re very

conservative. Although the loan may be current, we sometimes impair them because we see uncertainty in the economic environment at that particular time. So that’s how it works.

The 70% that I was talking about is well-collaterialised, and it is concentrated in two lumpy loans, two commercial property developers. So because of that, I’m not very worried, because the margins are very low and it’s just a matter of time before we realise it back.

So, that’s why, as far as how intact my portfolio is, I’m not so worried. I don’t have much exposure, for example, in oil and gas. It’s very small. And ours is more to downstream players. We don’t view it as something to be concerned about.

My NPL incidence is quite low. If you take out those two big lumpy loans, I think it would be circa 1.1%, so it’s very low. I’m quite comfortable. And for retail, it’s much lower. So that’s why, I’m not so worried. I do take a conservative stand with regard to my NPLs.

None of the property developers have defaulted?

I can’t talk about that.

Your property development exposure as a percentage of your total loans?

It’s 7.1% in real estate.

How does that compare with the other banks?

Most banks would have about 7% to 8% or so, and we’re about 7.1%, so we’re about the same as the industry. Total exposure to property — let’s say 8% (including residential) of our RM134 billion loan book.

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