This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.
AMMB Holdings Bhd cut its profit growth targets for the full financial year ending March 30, 2016 (FY2016) following the release of subdued half-year results last week — a reflection of the tougher times banks are facing in a slower economic environment.
AMMB, currently the country’s sixth largest banking group by assets, now expects its underlying net profit growth in FY2016 to be flat compared with expectations of 3% to 5% growth just three months earlier. In FY2015, underlying net profit fell 2.9%, but grew 7.6% on a reported basis, to RM1.92 billion.
It also expects return on equity (ROE) to come in at around 10.5% this year compared with an earlier target of 12% to 12.5%. As for dividends, it is now guiding for a 40% to 45% payout ratio compared with 40% to 50% before. Last year, ROE stood at 13.8% and the dividend payout ratio was 43%.
“The downgrade [of its FY2016 targets] is a reflection of the more challenging times banks are generally going through. AMMB’s current guidance implies that it is looking at a stronger second half of the year,” a banking analyst tells The Edge.
It will be interesting to see if other banking groups tone down their forecasts for the full year, analysts say. It wouldn’t be surprising as the industry is grappling with subdued loan growth, a tighter liquidity environment, weak capital market activities and rising credit costs as economic conditions weaken.
An AMMB official tells The Edge, “We downgraded the forecasts to reflect the [slower] economic outlook and the more cautious view we have on some of the sectors. That, and the fact that we didn’t hit our mark in the first quarter — we’ve done better in the second quarter than the first — we wanted to be more realistic in our targets.”
The group expects the country’s economic growth to slow to 4.7% this year from 6% last year.
“Now is the time when you have got to be cautious and you want to protect your balance sheet,” the official remarks.
AMMB (fundamental: 1.50; valuation: 2.55) reported a half-year net profit of RM722 million, which was a 6.9% drop from the previous corresponding period, excluding one-off gains from the divestment of certain insurance businesses in the first quarter of FY2015. ROE stood at 9.8%. The weaker performance reflected margin compression and a subdued operating environment.
In the second quarter ended Sept 30, net profit came in at RM382.5 million, which was 14.2% lower on a year-on-year basis, mainly dragged down by lower non-interest income. Net profit was, nevertheless, 12.7% higher than the first quarter, helped by a write-back for loan impairments of RM63.6 million.
“AMMB’s net profit was broadly in line with expectations because of the loan impairment write-backs. Pre-impairment operating profit was, however, lower than expected,” says a banking analyst who tracks the group.
A point to note is that the group’s asset quality weakened over the quarter. Its gross impaired loan ratio rose to 1.95% as at end-September compared with 1.8% three months earlier. Analysts say AMMB attributed this mainly to a lumpy real estate account that has since normalised, which suggests that non-performing loans could drop in the next quarter.
For the full year, AMMB is targeting for the ratio to stay under 2%.
Analysts expect margins to remain under pressure as competition remains intense. Net interest margin (NIM) was stable on a quarter-on-quarter basis at 2.12%, but was significantly lower than the 2.54% seen a year ago.
The decline in NIM over the year is part of a trend that began in early 2014 when management decided to reduce low-income household exposure in its automotive finance segment, from which it used to derive high margins. Automotive finance used to account for 31% of total loans in FY2013, but now makes up 26%. The biggest portion of its loans are wholesale loans at 47% of its loan book.
AMMB’s overall loan growth stood at just 0.3% as at 1HFY2016. Excluding the automotive finance segment, growth was higher at 4.3%.
For the full year, the group now expects overall loans to expand by 2% compared with earlier expectations of 4% to 5%.
While the group’s capital ratios remain within expected requirements for now, chief financial officer Mandy Simpson says it is reviewing long-term capital plans and structure to meet more stringent Basel III rules.
“Generally, we’re still quite comfortable [where we are] by international standards. We’ve got time. We’ll continue to look for options,” Simpson tells The Edge. The group is unlikely to announce a review of its structure within this year, she says.
On group-wide basis, its common equity tier 1 (CET1) capital ratio stands at 10.5%. At the holding company level, analysts say AMMB has indicated that its CET1 is about 9.1% on a fully-loaded basis.
At the press briefing last Thursday, Simpson said the group expects to announce the appointment of a new group CEO soon, having already obtained Bank Negara Malaysia approval for its candidate.
The Edge had reported earlier in August that Datuk Sulaiman Tahir, the former CEO of CIMB Group Holdings Bhd’s consumer bank, CIMB Bank Bhd, was expected to take up the top spot at AMMB once the central bank gave the go-ahead.
Sulaiman, 52, who had been with CIMB Group for 25 years, resigned from CIMB Bank in August and has been on gardening leave since. He officially parts ways with the group on Nov 22.
AMMB has been without a captain ever since the previous group managing director Ashok Ramamurthy officially stepped down on April 1 to return to Australia to take on a senior executive role at Australia and New Zealand Banking Group Ltd (ANZ). ANZ is the single largest shareholder in AMMB with a 23.78% stake.
Datuk Mohamed Azmi Mahmood has since been acting group managing director.
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