AmMerchant Bank Berhad’s (AmMerchant) financial institution ratings has been affirmed at A+/MARC-1 premised on the Bank’s consistent strong market position in fee-based activities; improvement in the Bank’s asset quality, funding profile and capitalization. Furthermore, the successful listing of the investment banking arm on Bursa Malaysia is expected to increase the profile of the Bank and provide positive synergies within the Group.

The completion of AMMB Holdings Berhad (AHB) corporate restructuring in March 2005, entailed amongst others, an internal reorganisation and the listing of its investment banking arm via AmInvestment Group Berhad (AIGB). The said listing is viewed favourably as it is expected to unlock the value of AHB’s group investment banking activities amidst market preference for specialist niche players. Under AIGB, its principal activities are merchant banking, broking operations and fund management. AmMerchant heads the merchant banking arm providing a wide range of services such as corporate advisory, lending and underwriting. Going forward, there are plans for the merchant banking and broking operations to be operated under one entity and this will further enhance the synergies between the two divisions.

MARC views positively the strategic motivation for the creation of an investment bank within the context of capital market liberalization and increasing sector consolidation. At the same time, MARC takes the view that significant effort will be required in the more immediate term to realign management structures, risk management and corporate infrastructure before the combined entities can operate as a single, coherent entity. MARC will continue to monitor the developments and update the bank’s ratings once the rating implications of the restructuring exercise and reorganization on AmMerchant’s financial profile becomes more apparent.

The Bank continues to build its strength in fee-based and securities trading activities with lending activities primarily arising as a complementary feature of the merchant banking arm. Investment and dealing securities has been averaging at a sizable 44.0% of total assets over the last three years despite the reduction in securities portfolio brought about by heavy securities trading during the year. As expected, the Bank continues to exhibit its strength in corporate advisory and debt origination activities with market share, in terms of number of deals, of 12%, 21% and 14% in listings, capital raising exercises and mergers and acquisitions (M&A) in 2004. The Bank maintained its dominance in private debt securities issuance in 2004 with a market share of 21.0%. AmMerchant
expects a stronger performance in its M&A activities in 2005 with improvements to be seen in terms of market share and league table ranking.

Despite a reclassification of it non performing loan (NPLs) from 6 months to 3 months, gross NPLs declined by 14.5% as the Bank endeavoured to address its problematic loans. This decrease in NPL was mainly arising from four-fold increase in NPL reclassification to performing loans totalling RM341.2 million (FY2004: RM81.4 million). Net of provisions, net NPL ratio of the Bank continued to weaken to 14.8% resulting from the lower specific provisions arising from the high loan write off during FY2005. Nevertheless, the Bank’s net NPL ratio is lower in comparison to its peers. Going forward, significant improvement in its loan book quality is expected in view of the promising results for the first half of FY2006 (1HFY2006). Net NPL ratio declined to 6.9% on the back of NPL reclassification of RM315.0 million and higher specific allowance due to provision on all loans in excess of 7 years in age. This is viewed positively by MARC as it is an indication of the Bank’s commitment in curtailing its NPL and the adoption of a more sophisticated and stringent credit risk management.

Capitalization of the Bank strengthened further during the year with core capital ratio improving to 13.3% (FY2004: 12.7%) and risk weighted capital ratio (RWCR) of the Bank remained stable at 16.6% (FY2003:14.7%)

The Bank’s pretax profit charted an increase of 45.7% in FY2005 mainly arising from the significantly lower allowance for losses of RM47.0 million due to the increased percentage of younger NPLs during the year. In addition, the strong performance of the stock market in 2004, allowed the Bank to provide lower diminution in value of investments of RM13.4 million. Improvements in AmMerchant’s profitability continued in its 1HFY2006 results, with pretax profit recording a 44.2% increase in comparison to the previous corresponding period. This was on the back of higher net gain from sale and revaluation of securities held-for-trading. The higher gains have allowed the Bank to boost its provisioning, reflected in the higher allowance for losses on loans and financing which is viewed favourably by MARC.

AmMerchant’s credit risk management is commendable, with an internal credit rating model in place since 1999. The Bank’s risk management preparation for the Standardised Approach, Basel II framework is well underway with expected implementation by end of 2006.