Thursday 28 Mar 2024
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KUALA LUMPUR (March 1): Analysts have slashed their target prices for AMMB Holdings Bhd (AmBank) by 14.7% to 30.5%, citing the RM2.83 billion 1MDB settlement as a “negative surprise”.

CGS-CIMB analyst Winson Ng noted in a note today that the settlement was a “negative surprise” as “AmBank had not disclosed any discussions between the bank and the regulator previously”.    

“Factoring in the RM2.83 billion 1MDB settlement, we are now forecasting a net loss of RM2 billion in FY21 versus our net profit forecast of RM829.6 million previously,” he said. 

Ng also reduced the FY21 dividend per share to zero.

“To factor in the negative sentiment arising from the 1MDB settlement, we widen the discount to our dividend discount model (DDM) value from 15% previously (for the credit risk from Covid-19) to 40% (partly for the reputational risk from the 1MDB case). All these lower our DDM-based target price from RM3.97 to RM2.76,” he said.

Ng downgraded AmBank to "reduce" from an "add" as he believed the stock would be clouded by the negative sentiment in the near term due to the 1MDB settlement.

“Potential de-rating catalysts include a net loss and the absence of dividends in FY21, caused by the 1MDB settlement,” he added.

Ng said a relief from this is the statement by AmBank that it has adequate capital buffers to absorb the 1MDB settlement and hence, it does not see a need to raise additional equity capital.

“Based on the estimates (for end-Dec 20) provided by AmBank, the 1MDB settlement would reduce its core equity Tier 1 (CET1) capital ratio from 13.5% to 11%, which would still be above the regulatory requirement of 7%,” he said.

Hong Leong Investment Bank Research analyst Chan Jit Hoong said the settlement was a “huge negative surprise” as it translates to 30% and 14% of AmBank’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 RM1.9 billion and reduce FY22-23 profit by 7%. Downgrade to 'hold' with a lower GGM-target price of RM2.95 (from RM4.05), based on 0.50x FY22 P/B,” he said in a report today. 

“According to The Edge Weekly, the RM2.83 billion was arrived at, based on a penalty of circa five times the RM600 million profit generated from the quick flipping of 1MDB bonds; the hefty RM2.83 billion settlement translates to 30% and 14% of AmBank’s market cap and book value respectively. As such, we anticipate a knee-jerk reaction to share price,” he added. 

MIDF Research’s analyst Imran Yassin Yusof also said in a note today he was surprised by news that the group had reached a settlement to pay RM2.83 billion for a transaction involving 1MDB.

He estimated that the impact of the RM2.83 billion provisions will turn the group’s FY21 performance from profit to a loss.

“Prior to the announcement, we are projecting a profit of RM1.28 billion for FY21. We estimate that the payment sum provision will cause the group to suffer loss of RM1.36 billion, ceteris paribus,” he said.

He also estimated that the payment sum will be a downward drag to its book value per share (BVPS) equating to 94 sen.

“We are estimating a drag of 86 sen to its FY21 BVPS. We should note that we estimate that it might take two years for the group to recover to the same level of capital prior to the settlement. As such, BVPS for FY22 and FY23 will also be affected,” he said.

He downgraded AmBank to "trading sell" from "trading buy", and revised down its share price to RM2.75, from RM3.60.

“Putting aside the financial and operational impact of the global settlement, we believe that it (the settlement) will have a short-term negative impact to investors’ sentiment on the group.

“We expect that its share price will be under pressure in the short term given that the news is very much a negative surprise in the market,” he said.

Meanwhile, Affin Hwang Capital’s analyst Tan Ei Leen revised down AmBank FY21 estimated net earnings by 262% in light of the provision sum of RM2.83 billion in 4QFY21.

“We concur with management that settlement of these legacy matters will enable the AmBank Group to focus on executing its future business strategies/undertakings, but inevitably, funding cost in the group will be higher in future, while FY22 to FY23 return on equity remains unexciting vis-à-vis peers at circa 9-10%,” she said.

She made an assumption of the additional funding cost in FY22 to FY23 amounting to RM130 million per annum (based on funding cost of 4.6% per annum).

“This funding cost results in a -8.5% and -7.9% impact on FY22 to FY23 earnings while further dampening net interest margin (NIM) by 8 basis points. We have also lowered our dividend assumption from a payout ratio of 30% to 25% to 26%,” she said.

Tan maintained a "sell" call on the stock and revised down its target price to RM2.90, from RM3.40.

“We think sentiment on the stock will remain lacklustre while we continue to have concerns on NIM given higher funding cost in the near future with potential RM2.8 billion Tier-2 Capital to be raised,” she said.

Trading of AmBank’s securities has been halted up until tomorrow pending an announcement.

The RM2.83 billion settlement is equivalent to nearly 30% of its market capitalisation based on last Friday’s closing at RM3.16.

In an exclusive interview with AmBank CEO Datuk Sulaiman Mohd Tahir last year, The Edge had asked the chieftain if there have been any issues on the regulatory front with regard to 1MDB and if there have been more fines since the last RM53.7 million fine in 2015. 

To these questions posed about six months ago, Sulaiman replied: “We have had no more fines since that first one.

“As far as our processes go, you can see where we are. We are in a good place, and I’m quite confident. And in fact, we’ve completed our compliance transformation programme as agreed with the regulator; we’re just about to come out of it. You can see our numbers, right? I mean, four years we’ve been living with it … and we’re coming out as a much stronger bank, well capitalised, well diversified, with a very committed set of people who know what they need to do. It’s a strong Malaysian franchise.”

Also recall, the proposed merger between AmBank and RHB Bank Bhd fell through in 2017 and one of the reasons speculated in the media and the investing community for the failed talks then was due to a potentially large contingent liability related to 1MDB that AmBank might have to recognise, to which AmBank denied.

Edited ByJoyce Goh
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