Recent proposal to dispose of non-performing loans to Aiqon Capital could be a prelude to activity: HLIB Research

Potential M&A on the cards for AMMB?

PETALING JAYA: AMMB Holdings Bhd’s recent proposed disposal of its non-performing loans (NPLs) could be a prelude to merger & acquisition (M&A) activity, said HLIB Research.

“While management said this was a capital relief move, we think it could be an exercise to clean up its books to pave way for a potential M&A. Recall, there were attempts in the past by both ANZ Banking Group and Tan Sri Azman Hashim (major shareholders) looking to dispose their stakes but failed,” it said in a research note today.

To recap, AMMB’s wholly owned subsidiaries AmBank (M) Bhd and AmBank Islamic Bhd are disposing of their non-performing loans/financing along with all interest, rights, benefits and entitlement to Aiqon Capital Group’s special purpose vehicles (SPV) for an aggregate amount of about RM554 million.

The AMMB management hosted a conference call on Monday and reassured investors that the price discovery for its RM554 million non-performing loans were determined on an arm’s length basis.

“However, AMMB was unable to share further financial aspects of the deal with Aiqon Capital. While this move could bump up our FY19 earnings forecast by 30%, recoveries in the future may be lesser,” it noted.

HLIB said it is convinced that there are no corporate governance issue as everything was conducted on a proper manner, to its best knowledge.

“Besides, we believe the final disposal amount should not deviate much from the RM554m, since it is only couple of months away from the targeted completion by March 31, 2019. However, this move to monetise its future collections would mean that future recoveries may be thinner.”

“We estimate every 10bp increase in net credit cost could reduce our FY20-21 earnings forecasts by 6%. For now, we have pencilled in a net credit charge assumption of 8-9bp in our model. Note, recoveries narrowed in size by a 10% compound annual growth rate (from FY15-18),” it added.

The AMMB management claimed that it makes commercial sense to monetise its future collection after assessing against the costs and efforts needed to maintain these NPLs (via net present value test).

“That said, the downward adjustment quantum on the headline RM554m was not disclosed; we gathered this would hinge on any NPL collection from between the initial price discovery and the transaction’s cut-off date. As for further potential NPL disposals in the near term, management dismissed odds for the consumer portfolio since the Aiqon’s deal was already very comprehensive (537,068 accounts, mainly retail based) but did not rule out the business segment,” it said.

The disposal amount was within the valuation range of RM450-RM750 million as appraised by KPMG Corporate Advisory.

HLIB Research is retaining a “hold” call on AMMB with a target price of RM4.70.

“Risk-reward profile of the stock is balanced. Key positives are improving cost-to-income ratio and steady asset quality trend. However, we are still concerned of a potential upward normalisation of its net credit cost in the medium- and longer-term coupled with its high LDR of 99%,” it explained.