This article first appeared in The Edge Malaysia Weekly on March 8, 2021 - March 14, 2021
IT has been about a week since AMMB Holdings Bhd stunned the market on Feb 26 with news that it would be paying a massive RM2.83 billion to the Malaysian government as a global settlement for the group’s involvement in the 1Malaysia Development Bhd (1MDB) scandal — but many questions remain.
The investment community, in particular, is miffed that there had been no warning that this was coming. “The potential risk of such contingent liability has never been highlighted,” UOB Kay Hian notes in a recent report.
In an exclusive interview with The Edge last Thursday evening, AMMB CEO Datuk Sulaiman Mohd Tahir says intense discussions with the government commenced only in February. This then led to a point where a decision had to be taken on whether to settle or take the legal route.
“There were no claims, nothing on my table, no amount sent or stated and agreed on with the authorities prior to that period in February. Clearly, I couldn’t put something as a contingent [liability] when I had nothing at that point in time. If I were to do so, that would be misleading,” he states.
Usually candid and chatty during interviews, Sulaiman was guarded in his comments this time. Bound to some extent by legalities, he was initially reluctant to speak to us, but finally agreed in a bid to address some of the questions that the deal has thrown up. Sulaiman was part of the team negotiating with the government.
He stresses that the RM2.83 billion, while hefty, is something that is within the group’s capacity to absorb. “We explored all options, and the board and management decided this was best option for the bank in order to protect the franchise.”
Notably, he reveals that, as part of the settlement agreement with the government, the group has the right to go after the individuals and parties responsible for landing it in this situation. The Edge, citing sources, reported on March 1 that the settlement is related to the banking group’s handling of the RM5 billion bond issue by 1MDB in May 2009.
Below is the interview with Sulaiman.
The Edge: How long have you known that this settlement was coming? How long ago did discussions/negotiations for this settlement start?
Datuk Sulaiman Mohd Tahir: It was in February that discussions intensified. Prior to that, it was more about us cooperating with the authorities, providing information when it was asked for and so on, for the other court cases. It was only in the last week or so [of February] that we had to undertake an evaluation of what the clear options were for us — make a settlement or take the legal route.
We had to consider, if we were to go for the legal route, what would it do to the value of the franchise, as we expected that it would be long and protracted, and then there’d be legal costs, distraction, probably multiple suits — it could be coming from us, it could be coming from the government — and this would not be good for anyone.
Then there was the question of, if we were to go for a settlement, what kind of quantum should it be? It had to be something that is within our capacity to absorb. If it had been something that wasn’t in our capacity, certainly, we would have contested it, and then the legal route would be an option.
So, when we landed on the settlement figure, we had [already gone through] many rounds of iteration and discussions [on] the impact on us. We had had many board meetings and went through the process of acceptance, pushback. And as soon as we landed on a settlement sum and terms and conditions, as approved by the board, and of course agreed by the government of Malaysia, we made the announcement as fast as we could. That’s how it came about.
To put things into context — did we discuss it robustly? Yes, we did. Did we discuss with the board, what the available options for us were? Yes, we did. When we made the decision on the settlement, did we consider the impact to the bank? Yes, we did.
At what point did you know it was going to be a settlement?
In that week itself of the announcement. We looked into exploring the settlement option and what the impact would be like to the bank as a whole as well as the quantum, by looking at various simulations on impact to our capital and our capacity for absorption. When we made the decision, it was with full consciousness that it had to be something that would be acceptable to the government of Malaysia.
We understand you told analysts that AMMB was given only a few days to negotiate the settlement. Yet, there were already rumours going around last year about the group potentially being hit by another 1MDB-related fine — we even asked you about it in an interview last September. (You indicated “no” and said the group had already done all it needed to do to move on.) Please comment.
When I spoke to you at that point of time that I had nothing on my table, there was really nothing. By that, I mean there was nothing to talk about, nothing to announce. I cannot be announcing something that I don’t have. Yes, rumours are rumours, and I really don’t know where they came from, but as far as I’m concerned — as I indicated to you at that point in time — I had nothing on the table, and I still maintain that position.
Are you saying, at that time, no one from the government or any other agency had already reached out to the bank on this matter, for you to have some indication that this thing might be coming?
As you know, and I mentioned this even then, we had been cooperating with the government in relation to the other court cases. We’ve always been providing information because it is an existing, ongoing case. And because of that, we had been very cooperative. And this position that we’re in only happened in February. And that’s when we had those intense discussions in terms of how we go about approaching it, either from a legal angle or from a settlement point of view. But as at September, when we had that session with [The Edge], there was really nothing.
Many are wondering why there was no disclosure, or any warning, made prior to Feb 26. There is a view that AmBank should have made known the risk of such contingent liability from the time it received notice from the Ministry of Finance.
There were no claims, nothing on my table, no amount sent or stated and agreed with the authorities prior to that period in February. How can I put something when it’s not there? Clearly, I can’t put something as a contingent [liability] when I have nothing at that point of time. If I were to, that would also be misleading.
Was this the reason the planned AMMB-RHB merger fell through in 2017? Even at that point, people were talking about potential contingent liabilities at AMMB in relation to 1MDB.
If there were rumours circulating around this, they were merely rumours. A merger is about two parties, right … both have to agree to terms and conditions (T&Cs) and we were given time to debate about [these]. Ultimately, when we decided not to do it, we both announced that we couldn’t come to an agreement on the T&Cs of the merger. And that’s what it is.
So this issue never came up?
In my discussions in the merger process, this thing never came up. It’s always been about the T&Cs, as we announced.
Goldman Sachs (GS) clawed back bonuses and so on from their top executives responsible. Will AMMB go after the executives responsible? (We are not referring to those who implemented the flipping of the bonds. We are referring to the people — one or two individuals — who made the decision to sell the bonds to Jho Low and collaborators and then re-sell immediately to local institutions.)
It’s quite different, you can’t compare our case to the GS case. In the GS case, clearly — as per news reports — there was a claim, leading to an admission of liability, names were mentioned. In our case, when we arrived at a resolution, it’s really without an admission of liability as it’s not gone to a court process.
But, as part of the settlement agreement with the government, we have a clause where we reserve the right to go after the individuals or parties that were responsible, but it will have to go through due process. And that is something that we will certainly consider.
Are all the key individuals involved in the 2009 RM5 billion bond sale now out of the bank?
They have not been around since we did the remediation programme with Bank Negara Malaysia. We have the right to go after the individuals or corporations that were involved.
Are you saying some are still with the bank?
Those involved with the transactions are no longer with the bank.
To confirm — this settlement IS in relation to the group’s handling of that RM5 billion bond sale?
As announced by the Ministry of Finance, it pertains to dealings that the group had with 1MDB and its subsidiaries.
But it’s widely known out there that it’s about the RM5 billion bond sale.
…which includes that as well.
Datuk, how was the sum of RM2.83 billion derived at?
We looked at our capacity to absorb. It could have been worse, from a factual perspective, a claim could also be made to include the long-term interests to be paid on the coupon. When we had discussions, we had the option to go to court and go through a long process. When we looked at the settlement, it was within our capacity to absorb. In terms of quantum, there was a robust discussion not only on the amount but also on the terms and conditions. Finally, when we arrived at the amount after negotiations, the announcement was made.
Yes, but how did you land at RM2.83 billion?
Clearly, it is a negotiated process between us and the government, bearing in mind that the government has a position and we have a position, and we went through a series of intense, protracted negotiations, until we arrived at the amount that was mutually acceptable to both parties.
RM2.83 billion is no small sum. It is nearly 30% of what your market value was and more than double the RM1.34 billion the group made in the financial year ended March 31, 2020 (FY2020). How do you plan to settle it?
The reality is, we are comparing the settlement that we are able to absorb against going through protracted legal proceedings, where eventually it will reach a settlement, but the franchise would have been damaged. Arriving at the amount, the debate and discussions, the pushback that we had with the government were intensive. Finally, when we landed on a number, the consideration was if this was something we have the capacity for. The rational thing to do is to focus on the settlement. If we were to consider the last option, the legal proceedings, what would that mean to the franchise?
The Edge reported in the previous issue that the amount was about five times the profit that the group made from flipping the bonds. Can you comment?
I don’t want to talk about something that didn’t come from us, or from me. Rumours will always be there. The point is, what is the settlement amount that both sides have agreed on and, at the end of the day, do we have the capacity to absorb it? If we didn’t have the capacity, we’d have contested it. And the third thing is, if we had gone through that protracted legal process, what would it mean for the franchise? We have spent a lot of time and money in building the franchise. If you see, in the last five years, we have really built up the bank. Ever since the fine that we had [from Bank Negara] five years ago, the remediation programme was implemented, we have put strategies in place, we have changed the management team, we have a new board, new focus, new reached segments and a lot of resources have been spent. This is what we were evaluating against the potential settlement amount. That’s where we came to that landing.
How do you plan to settle it? It will be paid over the course of …?
We negotiated to pay over a certain period, which we’ve agreed to keep in confidence. This is to ensure that the position of banks and its entities is intact. It’s not immediate.
There was an analyst report that said it might be over the course of a year, 12 months. Is that right?
It’s over a certain period, something we can manage.
When do you expect to bounce back from this? Is it a given that in FY2021, because of this settlement, you’ll be in a position of net loss for the full year?
Yes, as you know, the bank has a steady profit accretion of about RM1.3 billion a year, so if you have a settlement of RM2.83 billion, clearly it will be in losses for one year. But, I’m confident because we’ve built the bank up over the last five years and we are seeing consistent top-line numbers and profitability. It has been steady. We are managing our non-performing loans and costs. Hence, we will bounce back in the first quarter of FY2022 (April to June quarter). In 4QFY2021, we’ll have a big one-off hit.
Through provisions?
It will be through provisions as and when we make the payment. The expense of the provisions will be in 4QFY2021.
Moving on — how do you feel about this settlement, Datuk? Is there a sense of relief or defeat?
It is a big amount. It was a difficult decision to make because it was a really complex negotiation. There was the government of Malaysia and there are multiple parties, and we are operating in Malaysia. It was difficult. And the amount itself is huge, I must say. We took five years to accrete these kinds of numbers, to improve our CET-1 (Common Equity Tier 1) ratio. When I first started, it was like 10.5% and today, it’s 13.5%. So, to have [CET-1] fall back as a result [of this event] in just a matter of a short period…
But on the flip side of it, it’s also a relief. This is a very public matter and our name has been in the papers. So I’m glad that we can put this behind us. And now, let’s move forward with the new strategy that we have put in place. It is what it is. It has been quantified. We want to put it into our P&L for FY2021. FY2022 onwards, we want to drive the business.
We are a different bank from five years ago. From a CET-1 of 10.5% to 13.5%, with an asset and deposit base that is consistently growing. We completed the remediation programme with flying colours. We have improved ratings from PIDM (Perbadanan Insurans Deposit Malaysia). We are known as one of the top 20 listed companies in Asean with the best corporate governance, as announced by MSWG (Minority Shareholders Watch Group). We have done it before, we can do it again. This time around, the beauty is that we have no more legacy [matters].
What will provisions look like in 4QFY2021? Because apart from the settlement, there’ll be other things you’ll need to make provisions for.
Provision will be the RM2.83 billion for the quarter; that will be the largest one for the quarter. Other provisions, we don’t want to jump [the gun] and forecast, but certainly we’ll make adequate provisions with regard to Covid-19 or moratorium and business as usual.
AMMB has said that the provision for the payment sum will translate into a proforma group loss of 93.89 sen a share? So, it could actually be lower when you take into account everything else?
Correct.
What’s the indication going forward?
How we will recover, clearly it is about steady recurring profit accretion of about RM1.3 billion. We are confident of our loans growth, as a result of loan composition and CASA (current account and savings account), and our non-interest income numbers. RM1.3 billion to RM1.4 billion Patmi (profit after tax and minority interests) is something we will achieve.
As a bank, we will also review our companies, looking at the potential divestitures and disposals. We are moving to FIRB (Foundation Internal Ratings-Based system], which measures the density of assets. CET-1 is a function of shareholders’ funds against density of assets. When we move into FIRB, we will be reducing the density of assets. This means the risk weight drops and our capital ratio increases. That adds close to about RM1 billion worth of additional capital … which translates into around 1% uplift from a capital perspective. That is a plus point.
So, we are looking into three things — there is the accretion of profits that we make, the review of the companies … looking into our core and non-core, as well as recalibrating the density of our assets. These will bring the capital level to where it was before, if not better.
You’ve indicated that the group CET-1 ratio will come down from 13.52% to 11.01% — we note that this will be the lowest of all the banking groups. But you’re comfortable with that? You don’t see an immediate need to raise additional equity capital?
Our CET-1 level is sufficient for us to operate the business. We don’t have to do a cash call or a rights issue immediately, but certainly through the accretion of the profits and through the [realigning] of businesses and FIRB, these will improve our capital as a whole. We are targeting March 2022 to [move to FIRB]; it is a long process to get there. The team has been working on it.
But you’re raising Tier 2 capital?
The thinking to raise Tier 2 [capital] is because it increases our total capital. Our total capital is sufficient because the more important ratio is CET-1. So we may not raise as much Tier 2 as we originally thought we would.
At AmBank level, what is your CET-1?
Overall, the group will not go below 11% CET-1 as an internal target. All entities — AmBank, AmIslamic Bank — will not go below 11% CET-1 and AmInvestment is above 20% CET-1.
So, which of AMMB’s units will take the brunt of the hit — AmBank? AmIslamic? AmInvestment?
The agreement with the government is AmBank group and its subsidiaries. The whole group will be impacted.
Can you give us an indication of what your legal costs will be like?
Incidental costs such as legal costs will be just a fraction of the entire cost. The major cost will be RM2.83 billion, which we will accrue accordingly.
Has the settlement expedited the need to divest some of your assets? There have been news reports on an expected sale of your stake in AmMetLife Insurance. Would this happen before end-FY2022?
We continue to look into what is core and non-core for us. When it comes to disposals — and this is not specific [to AmMetLife] — we will do it only if we can get the best value for shareholders and if it makes sense for us, and if we feel we have the right participants and the right offer. It has been ongoing since five years ago and we will continue to explore. It is still on the table. We will look at potential offers and make a decision based on the best value for shareholders and the group. We are still going through the process.
There is increasing talk that the settlement will expedite a takeover of, or merger of other banks with, AMMB. What are your views? Is that on the board/shareholders’ agenda? Are there any preliminary proposals on the table?
I am not a shareholder. The shareholders will decide based on best value. I can’t speak on their behalf. As management, we want to deliver and make sure that the bank is successful. We’ve done it before and we’ll do it again. Shareholders will evaluate and look at what value is being offered, bearing in mind it needs to go through regulators.
Shareholders aside, does the board want to explore an M&A?
I can’t speak on the board’s behalf as I am not on the board. As part of corporate governance, I am not on the bank board but I am on some of the subsidiaries’ boards. This is to ensure there are separate structures for board and management — it is a new structure since five years ago.
Would you be able to say anything about the status of ANZ’s plan to exit AMMB? Has ANZ approached the board with any proposals of late?
ANZ [in] Australia will decide. I can’t say.
Has AMMB decided yet if it will apply for a digital bank licence? We notice it was included as part of your Focus 8 strategy.
This is something that we will consider right now. We will explore and find the right partner as well as a suitable business model. Exploring a digital bank is not only about doing banking digitally, we also need to understand and explore what segments we will go into and if the investments make sense.
In the past, you’ve been doing a net profit of about RM1.3 billion. So you’re confident that you can go back to that kind of level of profitability in FY2022?
Yes, I’m confident. We have the visibility on this. We are a different bank today. We have put in systems and processes. We are chugging along. Now, it’s about fine-tuning. The business model is strong and it is ready. We need to continue doing what we are doing so we can generate more value for shareholders.
We want to put this settlement behind us and we look forward to driving our Focus 8 strategy. There are eight areas we want to focus on. [Growing] ROE (return on equity) is our main agenda … there are partners and collaborations, digitalisation and digital banking. We are working hard and the team is motivated. Yes, this is a hit, but we will put this behind us and focus on the future.
See also ’The buck should not just stop with AmBank’s shareholders’ on Page 43
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