This article first appeared in The Edge Malaysia Weekly on September 21, 2020 - September 27, 2020

THE crisis sparked by the Covid-19 pandemic is like no other the banking industry has gone through, says Datuk Sulaiman Mohd Tahir, group CEO of mid-sized lender AMMB Holdings Bhd.

During the 1997/98 Asian financial crisis — when Malaysian banks were truly put to the acid test — interest rates were high and borrowers struggled to service their loans, even as lenders pushed them to pay up.

“It was terrible. Interest rates were high, people couldn’t pay — even when the loans were restructured, they still struggled to pay. The [thinking] at the time among banks was that when things are tough, you clamp down,” Sulaiman recalls. Back then, he was just starting out in the industry as a relationship manager in business banking at Bank of Commerce, which later became part of CIMB Group.

The big difference now, he points out, is that interest rates have dropped “so much” — the central bank has cut the overnight policy rate by 125 basis points (bps) so far this year to a record low of 1.75% — and banks have given borrowers a reprieve by offering an automatic six-month loan moratorium to individuals and small and medium enterprises (SMEs). These moves have allowed both banks and borrowers to better manage their financials even as Malaysians grapple with a new normal of life and work.

“The abnormal becomes the new norm and you just have to adjust. Yes, although lower interest rates affect our margins as a whole, these [and the moratorium] help in managing the non-performing loan (NPL) position much better than [in previous crises]. And that is a good thing,” Sulaiman, 57, tells The Edge in its first one-on-one interview with a bank CEO since the onslaught of the coronavirus.

During the two-hour conversation, he speaks animatedly about what AMMB is doing to contain the fallout from Covid-19 and the way forward. He is confident that its early and ongoing measures to actively engage borrowers who are vulnerable, particularly SMEs, will help the bank to have a soft landing.

The sixth largest of the eight local banking groups in terms of assets, AMMB is in a much better position today to ride out a crisis than in the past, say analysts. Under Sulaiman, who took the helm in November 2015, the group has eased its decades-long focus on large corporates, turning instead to mid-sized corporates and SMEs for growth. On the retail front, it reduced its concentration on hire purchase — a high-margin, high-risk business — to push growth in the mortgage, particularly affordable housing, as well as cards and wealth management businesses.

This transformation — charted out in Sulaiman’s four-year “Top 4” strategy, which ended in the financial year ended March 31 (FY2020) — has helped put the group on a more solid foundation to move forward. Notably, under Top 4, AMMB made good strides in the SME space, where lending grew 1.73 times to RM20.6 billion in FY2020 from RM11.6 billion in FY2016, and in CASA (current accounts and savings accounts). Its CASA-to-deposits ratio improved to 25.5% from 20.7%.

The bank is now ready for the next stage of growth. It recently embarked on a new four-year strategy — known as Focus 8 (F8) as there are eight areas of focus (see chart)  — aimed at achieving a return on equity (ROE) of at least 10% by end-FY2024.

In a nutshell, F8 will see AMMB tap the same segments covered under Top 4, but in a more targeted way. It will also drive efficiency through further digitalisation efforts at the bank.

According to Sulaiman, the bank — which currently has 8,000 employees — may be able to reduce its headcount by 700 or 800 by FY2024 in a bid to drive efficiency. “There’ll be attrition and there could be new spin-off businesses that we create that will require people,” he notes.

When asked, Sulaiman says the bank cannot rule out a mutual or voluntary separation scheme either.

He adds that, as part of F8, the bank is considering setting up a separate digital bank with partners (see accompanying story).

While some may think 10% seems like a low ROE target to aim for, several analysts beg to differ. “This is no lowball target. The reality is that the environment out there is really tough and achieving even 10% will be an uphill task. Frankly speaking, none of the banks have hit their targets in recent years. It’s just the environment,” a senior banking analyst tells The Edge.

As at FY2020, AMMB’s ROE stood at 7.4% — missing the bank’s target of 8% to 8.5%. On an underlying basis, however, it was 8.1%.

According to Sulaiman, ROE growth will be a major focus of the bank under F8. “Apart from building capital-light revenues, we plan to grow our ROE in two ways — by ridding ourselves of RM3 billion worth of intangible assets sitting in our books, which is quite a large percentage of shareholders’ funds of about RM17 billion, and changing the way we measure risk in our portfolio, from a standardised approach to foundation internal ratings-based (FIRB), like bigger banks such as Maybank and CIMB,” he says.

Much of the RM3 billion in intangible assets is goodwill from AMMB’s past acquisitions. “It is abnormal for a bank of our size to have such high intangibles. This needs to be dealt with so we can rectify our ROE,” says Sulaiman.

AMMB is considering divesting some businesses in its efforts to do so. The group CEO declines to reveal which assets are under review for a potential divestment but observes that, based on recent industry trends, the insurance, stockbroking and fund management businesses tend to be the ones divested or turned into partnerships. “These days, banks can still do those businesses — via partnerships or product distribution — without owning them entirely,” he remarks.

According to a Bloomberg report last month, AMMB and US insurer MetLife Inc, which jointly own AmMetLife Insurance Bhd, are exploring a sale of the business.

Sulaiman expects AMMB’s NPLs to rise, like those of most banks, after the blanket moratorium ends at end-September but he believes this will be manageable. The group has made a preemptive provision of RM177 million so far in relation to Covid-19, of which RM167 million was booked in 4QFY2020 and RM10 million in 1QFY2021.

“NPLs will go up. But the question is, by how much? Will it be more than two times or three times [from where we are today]? I don’t think so. My sense is that it will be less than two times,” says Sulaiman.

He foresees no single big corporate or SME loan that could blow up unexpectedly. Among individual borrowers, however, there is less visibility on how the NPLs will pan out — not all who took up the moratorium may have actually needed it and the bank is reaching out to those it deems vulnerable. As at end-June, about 60% of the group’s loan base, or RM64 billion, came under the moratorium.

According to Sulaiman, AMMB had 13% exposure to vulnerable segments. These included borrowers in sectors such as hotels, travel and aviation, those working in Singapore and businesses that experienced a sharp drop in sales because of Covid-19.

“I am very comfortable with the SMEs and corporates. We have full visibility [on how they are doing], as we are on the ground, working closely with them. My biggest worry, though, is the individual borrowers, those with mortgages, hire purchase (HP) and personal loans,” he says.

“But, then again, our mortgages are mostly for owner-occupiers — people who buy and live in the homes. Furthermore, we do a lot of affordable housing, where the NPLs are much lower, and not so much on speculative [investment plays]. So, it should be manageable.

“If there is anything we are [concerned] about, it is HP. But we’ve been winding down the portfolio for some time. Last year alone, we reduced it by RM2 billion. So, we are just mindful about the new [customer] acquisitions and we are reaching out to them. As for personal loans, we are quite small.

“If we can help to restructure the loans, we will. It is in our interest to do so.”

The banking group’s gross impaired ratio stood at 1.66% as at end-June, down 1.73% from three months earlier.

It recently reported a net profit of RM365.17 million for 1QFY2021, down 6.7% year on year but up a strong 47.5% quarter on quarter — coming in slightly above analysts’ expectations. This accounted for 37% of analysts’ consensus forecast for the full year.

However, Maybank Investment Bank Research, which has a “buy” call on the stock, did not revise upwards its earnings forecast for the bank, as it thinks provisions will rise in the coming quarters.

Bloomberg data shows that of 16 analysts who track AMMB, eight have a “buy” call on the stock while seven have a “hold” and one a “sell”, with the average 12-month target price at RM3.34. The counter, which has shed 21% so far this year, closed at RM3.01 last Friday, giving the bank a market capitalisation of RM9.06 billion.

Sulaiman’s colleagues say he is as hands-on as it gets, hunkering down early at the onset of Covid-19 and personally going through the details of AMMB’s more than 10,000 SME customers, “line by line” to gauge their vulnerability. “He is the right ‘wartime CEO’ for the bank,” says an industry observer.

Still, Sulaiman will face an uphill task in growing the bank, considering the low interest rate environment and uncertainty over how long the pandemic will last.

His contract comes up for renewal in March next year. Does he want to continue?

“I want to retire!” he laughs. “No, but seriously, the way I see it, I have brought in a lot of people to help shape the organisation into what I wanted it to become. In that sense, I have an obligation to see this through with them. I am 57 — three years to go [before retirement] — so that means the least I could do is stay until I finish the job and then go on another path.”

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