AmInvestment Bank Bhd - 2009

MARC has affirmed its AA-/MARC-1 financial institution ratings on AmInvestment Bank Berhad (AmInvestment). The outlook on the ratings is stable. The affirmed ratings reflect the consolidated strength of the banking entities of AMMB Holdings Berhad (AHB/AmBank Group) which is underpinned by strong investment and retail banking franchises as well as sound core profitability, asset quality and capitalisation on a combined basis. The ratings are consistent with MARC’s methodology of aligning the ratings of core banking entities to a notional group rating where a universal banking strategy is employed and where operational integration and shared branding exists. Accordingly, the positive credit effects of being part of a collectively larger, stronger and more diversified banking franchise are embedded in the rating of the AmBank Group’s wholly-owned subsidiary AmInvestment, along with that of operational and managerial support from Australia and New Zealand Banking Group Ltd (ANZ), with which AmBank Group has forged a strategic partnership. AmBank Group is Malaysia’s fifth largest banking group by asset size. MARC believes that the partnership with ANZ will continue to positively influence the banking group, including AmInvestment in the areas of risk management and new revenue development. ANZ is currently the single largest shareholder of AHB, AmInvestment’s ultimate holding company, with a 19.17% stake.

Since MARC last affirmed AmInvestment’s ratings in April 2008, the investment bank’s earnings performance has been visibly affected by weak equity and debt market conditions. Its asset base, meanwhile, has contracted significantly with the transfer of its loans and treasury assets to AmBank (M) Berhad (AmBank), the commercial banking entity of AmBank Group. In the near-term, MARC expects AmInvestment to demonstrate increased earnings sensitivity to capital market activity considering the current market environment, and particularly with its reduced asset base. Mitigating factors and developments include the investment bank’s de-risked balance sheet, strong capital position as well as benefits from greater operational integration with AmBank with the creation of a universal banking platform. At the consolidated level, AmInvestment’s more volatile earnings profile is balanced by AmBank’s more stable earnings contribution.

AmInvestment‘s status as a core banking entity of the AmBank Group continues to be supported by its strong investment banking franchise, as evidenced by its ability to secure mandates in debt and equity origination as  well as merger  and acquisition (M&A) and IPO advisory services. Through its subsidiaries,

AmInvestment also provides funds management, equity and debt trading services. Post-restructuring, the investment bank operates with a leaner balance sheet, having transferred its treasury and large corporate lending activities to AmBank and AmIslamic Bank Berhad (AmIslamic) and reduced its capital base. The focus of the investment bank under its revised strategy will be on capital investment banking activities that do not entail balance sheet leverage.  Going forward, AmInvestment will rely on the balance sheet strength of AmBank to provide lending and underwriting capacity for its investment banking transactions. AmBank, in turn, has assets totalling RM68.2 billion as at end of December 2008. The commercial bank has exhibited improved financial metrics in recent years. Asset quality, as measured by its gross and net NPL ratios, have improved to 5.75% and 3.11% respectively as at end-December 2008 from previous highs of 14.6% and 11.9% as at end of FY2005. AmBank is strongly capitalised with RWCR of 12.2% as at end-December 2008 with support stemming from tier-2 debt issuances. In March 2009, AmBank completed its issuance of RM500.0 million Non-Innovative Tier-1 capital to reinforce its capital position.

For the nine-month period ended December 2008, against lacklustre capital market activities as well as generally declining investment asset values, AmInvestment’s fee income fell by 44.2% to RM90.4 million on the back of a loss of RM18.7 million incurred from its disposal of held-for-trading securities. Consequently, the investment bank recorded a pre-tax loss of RM28.7 million for the nine-month period. During the period under review, AmInvestment also undertook a capital reduction exercise which saw a substantial drop in its capital base. Nonetheless, MARC views AmInvestment‘s capitalisation to be relatively adequate in light of its reduced exposure to credit and market risks under its revised investment bank strategy.

The future direction of the ratings will be sensitive to changes in the credit profile of AmInvestment as well as that of the notional universal bank. Rating factors that could have a negative impact include weakened capital strength, significant earnings decline and an accumulation of risks in the securities and loan portfolios as a result of a worsening macroeconomic environment.

Major Rating Factors

Strengths

• Major player in debt origination and corporate advisory services;
• Core banking entity of the fifth largest domestic banking group;
• Operational and managerial support from a strong global financial institution; and
• De-risked bank balance sheet, strengthened risk management and continuing risk reduction strategy.

Challenges/Risks

• Earnings to remain under pressure due to weak prospects for capital market related activities.