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Edited Transcript of AMBANK.KL earnings conference call or presentation 22-Aug-19 6:30am GMT

Q1 2020 AMMB Holdings Bhd Earnings Call

Kuala Lumpur Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Ammb Holdings Bhd earnings conference call or presentation Thursday, August 22, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chelsea Cheng

AMMB Holdings Berhad - Head of IR

* Fou-Tsong Ling

AMMB Holdings Berhad - Group CFO

* Sulaiman Bin Mohd Tahir

AMMB Holdings Berhad - Group CEO

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Conference Call Participants

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* Harsh Wardhan Modi

JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials

* Peter Kong

CLSA Limited, Research Division - Research Analyst

* Robert P Kong

Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to AmBank Group First Quarter FY '20 Results Announcement Analyst Briefing Conference Call. (Operator Instructions) I wish to advise that this conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Ms. Chelsea Cheng, Head of Investor Relations. Ms. Chelsea, please go ahead.

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Chelsea Cheng, AMMB Holdings Berhad - Head of IR [2]

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Hi, good afternoon, everyone, and welcome to AMMB Holdings' First Quarter FY '20 Results Briefing Conference Call for buy- and sell-side analysts. I hope you all had the chance to read through our presentation deck and press release before we start the call.

As usual, we will have Dato' Sulaiman to start off the presentation with a brief overview of our results, followed by Jamie, who will give you a bit more colors around the numbers.

Okay, Dato', please go ahead.

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Sulaiman Bin Mohd Tahir, AMMB Holdings Berhad - Group CEO [3]

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Thank you. Thank you very much then, Chelsea. A very good afternoon, everyone, for joining us. This seems not so long ago that we spoke about closing 2019 results just about 2, 3 months ago. So now we are in first quarter of year 2020. And what I'm going to do is that I'm going to cover with you the slides on Page -- on Slide 3, where we show a glimpse of our financial snapshot. And after which, I will hand over to Jamie to go through the details of the results.

Now I must say that we have a very good start in this new financial year, with PATMI up 13% year-on-year to MYR 391.5 million, and despite the very uncertain environment and headwinds this coming -- that's hitting us as well as in the coming quarters. I must say the NII has grown due to the build-up of the assets that we have done over the years. It's grown to -- it's gone up 4% year-on-year, in line with the growth in our balance sheet year-on-year. And the NIM has recovered this quarter to 1.87% from 1.78%, I think, before. Group Treasury and Markets trading income was stronger year-on-year, benefiting from the lower bond yields post OPR cut. Our General Insurance had some upside from lower claims and higher investment income. And our total income is up 5% year-on-year to MYR 1.65 billion (sic) [MYR 1.065 billion].

But the marginal increase in expenses still were contained. We still continue to drive our BET300, resulting to a positive JAWS and CTI, 49.7%. This is despite the challenging environment, and certainly something that we will do a lot more of if the outlook on the revenue is challenged. Our profit before provision expanded 7% year-on-year as we grew revenue faster than our cost. We had a net recovery this quarter, mainly underpinned by net write-backs on corporate loans. While we continue to work on the other potential recoveries in the pipeline, we remain watchful of our asset quality as the prolonged trade war and weak global economy will not bode well for our customers. As of June of 2019, our GIL ratio saw a slight uptick to 1.66% from 1.59% in March 2019.

On the balance sheet side, our gross loans grew 2.5% year-on-year. But comparing with the previous quarter, March 2019, Q-on-Q -- or year-to-date loans growth was muted by large corporate repayments and a decline in our Auto Finance. Our lending to targeted segments such as Business Banking, Retail, SME and mortgages remains robust, still growing, although be it at a smaller -- at a slower pace.

Similarly, total customer deposits increased by 4.2% year-on-year, but down 3.9% year-to-date against March 2019. This certainly reflects our conscious decision in reducing liquidity buffers through releasing some of the higher-cost corporate and retail term deposits. Our LDR ratio stood at 94.5%, which is higher now compared to March 2019 at 91.1% or well within the range that we would like to operate as we need to defend our NIMs at the same time.

Finally on capital and liquidity, our CET1 of 11.9% remains adequate and our LCR is above 100%.

Before I move on to Jamie, let me just give you some ideas on the macroeconomic conditions going forward. While we're very pleased with our first quarter outcome, we believe that the operating environment continues to get tougher with the recent geopolitical tensions and rate cut moves by several banks -- central banks within the region.

Overall, we are maintaining our Malaysia GDP forecast for 2019 at 4.5%. We know that this is increasingly subject to downside risk. Headline inflation will be maintained and export growth to slow down to 2% given the escalating trade tensions. While our global -- our broad view suggests that the policy rate will remain stable at 3% for the rest of 2019, we think there's still room for BNM to reduce the OPR by circa 25 bps in the second half of the year, depending on the domestic economic data and dynamics of the global economy. Considering these factors, we project the banking system loans to increase around 4.6%, a la our GDP growth for 2019.

With this, I'm going to let Jamie go through the details. Thank you.

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Fou-Tsong Ling, AMMB Holdings Berhad - Group CFO [4]

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Thank you, Dato', and good afternoon, everyone. Let me go through some of the key highlights of our first quarter, and then we get into the Q&A.

Starting with Page 5. Now while the environment is not certain, I think it has been a steady start for us, and we ended Q1 with an income of over MYR 1 billion, so MYR 1.065 billion, up 12% Q-on-Q. So sequentially, we're stronger and up 5% year-on-year. PATMI of just under MYR 400 million, in fact MYR 391 million, is 15% lower Q-on-Q and 13% up year-on-year. ROE at 8.8% on an annualized basis. I will call out that in Q4 last year, we had a MYR 285 million net retail debt sale gain and therefore not repeating. Consequently on a Q-on-Q, would be, the numbers are much lower.

Now fee and income growth. NII up 6% or $40 million (sic) [MYR 40 million] quarter-on-quarter to MYR 669 million, and that's a 4% increase year-on-year. NIM, as it says on the slide, has recovered 9 basis points to 1.87%. This is in line with our guidance of around 1.85% when we last spoke. Fee income or NoII of 21% up, given that we have benefited from better contributions from General Insurance or the banking side of the [tally] trades, and the marking-to-market of our bond position is yielding us a better income for our fee-based income.

We've been disciplined on cost. Our CTI at 49.7%, we ran 2% positive growth year-on-year with revenues growing faster than cost.

We've also resolved certain large corporate accounts. I think this one, we flagged for a while now. I think we've been consistent in the way that we go about resolving some of our largest of NPLs. We've resolved one of that. And consequently, we benefited from the write-back of the provisions we established on that position. As well as there are also certain Stage 2 provisions that we established for general risk on a specific sector, and that sector over the 12 months performance had performed well. And consequently, we also benefited from the write-back of that provision. Now these offset increasing provisions in the Retail portfolio as well as Business Banking, which I'll come to later.

Detriment on asset quality. I think Dato' has talked about the kind of uncertain environment, of GIL uptick-ing slightly to 1.66%. I think the market is more subdued. You can see and you can read in the newspaper, there were a few corporates with PN17 cases emerging, a few high-profile shareholder disputes, and therefore were vigilant in terms of our asset quality outlook going into the remaining period of this year.

Capital levels are unchanged at 11.9% CET1. This is before any profit verification of the MYR 381 million PATMI that we've achieved during the first quarter. LCR healthy at above 150%, while all banking entities are already compliant with our NSFR. So we're well positioned there on the liquidity side.

Now moving to Page 7. The improving trend that we see on the furthest to the right. Overall, on a year-on-year basis, it's more green than yellow, so that's an improving trend. I think I'll call out a couple of things on the income side. But even if you looked at our momentum of 5% year-on-year. If you recall that the year before, we had MYR 22 million of foreclosed property gains last year. So if that is a one-off that has been normalized, our underlying income was much stronger at 7%.

Expense base is up 3%. Typically, our salary inflation this year was 5%, our wage settlement with our staff, rewarding them with 5%. The impact of IFRS 16, which is the property leases, is around MYR 2.5 million per quarter, so 10 million a year that's incremental. And we also changed our accruals of bonuses provision and expecting more accruals of bonus provisions within that. So all in, I think 3% with a positive JAWS of 2% has improved our operating leverage further. And cost-to-income ratio is below 50%.

Now on the net recovery of MYR 32 million. I've mentioned the write-back of one large recovery as well as the write-back of certain Stage 2 general provisions. There are also some emerging NPLs that were offsetting it. It's not big in terms of provisions. But certainly, it's also part of the reason why our NPL rose to 1.66%. All in, we have had an encouraging start to the first quarter, and we've set about our agenda this year.

Now moving on to the next slide on Page 8 on our balance sheet drivers. Certainly, balance sheet growth has been softer due to the subdued lending environment. While loan growth is up 2%, it contracted 1% since the start of this year. And consequently, our loan book of about $100 billion (sic) [MYR 100 billion] is relatively flat since the start of the year.

We've seen large corporate loan repayments. So that, again, a signal of people are paying down more debt than putting working capital and increasing inventory. There is also the decline of the auto loan by MYR 700 million in that. So those 2 areas in terms of large corporate repayments and auto loans reduction is the one that are the main drivers of that contraction. The plus side is that in our targeted segments of mortgages, Retail, Business Banking, it is growing, although the run rate of growth is much slower than the year before.

From customer deposits, I think one of the ways in which we are mitigating the first cut in OPR in May is to basically sweat our balance sheet further. We were paying excess liquidity buffer coming into this financial year and we're pricing for risk and basically upping our loan-to-deposit ratios a little bit more just to also manage through the margin compressions that we're facing.

On CASA, it's MYR 23.1 billion, so it's up 11% year-on-year. So cumulatively, I think it's also an area of our strategic agenda and that 11% growth in terms of the core balance is quite good to see. In Q4 last year, as we've flagged previously, we had some hot money from our corporate clients which flowed out to subsequent -- through the financial year, and consequently on a quarter-on-quarter basis, there has been a 7% decline in CASA balance. CASA mix stands at 22.5%.

Let me just turn on to Page 9 to give you a color around the income growth across our lines of business. And you can see that on the right-hand side, again, the year-on-year change. For most, our line of business income grew year-on-year and also Q-on-Q. Also Banking, Business Banking, General Insurance recorded double-digit income growth year-on-year.

Net interest income, which is the red bar at the bottom, has increased consistently, it's 4% up. And fee-based income, the gray bar, is up 6% at MYR 395 million, largely contributed by the higher trading income and investment income in Group Treasury and General Insurance.

Just more specifically around wholesale bank, the income growth of 15% increased from higher NII and stronger financial markets trading gains, partially offsetting the nonrecurring gains from the disposal of foreclosed properties in the first quarter of last year.

Investment banking income is broadly stable. So good to see that there is a base to this and that the performance of the investment banking and the fund management business remains market dependent.

Retail banking NII increased 2%, while it's offset by the fee-based income reduction of 15%, mainly due to low-cost related income and also wealth management fee income. Again, the investment side of the wealth management in retail is also showing the same trends as what we see in funds.

Now on Business Banking, this is a strong income growth of 16% year-on-year, albeit that the loans growth for -- of Business Banking is normally just in the first quarter of this year, boosted by growth in NII, which is up 18%, but as well as a higher fee-based income at 9% on the back of higher [bancassurance] fee generation.

General Insurance up 11%, underpinned by higher investment and also lower claims experience as the underwriting quality improved.

On Page 10, profit before provision and the operating efficiencies that we set up on all lines of businesses as part of BET300. You can see that for the banking business, that profit before provision grew 6%, and all lines of businesses have contributed to that and essentially a reflection of our cost discipline. Overall PATMI, which is gray bar at the bottom, is at MYR 391 million and ROE of 8.8%.

Now on Page 11. This is a quick summary in terms of profit formation between the first quarter of this year and the first quarter of last year. And overall, you can see that the booster is from income growth. So that's good to see that there's still revenue momentum, positive JAWS as well as a net recovery, which I'll come to in a minute. Effective tax rate is at 24%, delivering the PATMI of MYR 391 million. While the first trend has been a good start, a steady start for us, we remain cautious about the potential headwinds and the less benign credit environment that will emerge as we go along this year.

Quickly on the margins. Now the improved margin are shown on Page 12. Starting on the left-hand side, if you look at wholesale banking asset yields has improved by 7 basis points. Now we reap the benefits of our bond carry trade. The bond inventory income is in wholesale bank, in GTM, and that benefited from the fix received when lower inter-bank cost of funds post OPR cut. So that's part of the driver, it's half of the 7 basis points. The other half is lending margins are also reflecting our pricing for risk.

Retail margin, 5 basis points overall the recovery. But essentially, that is just the normalization of the auto loans' EIR adjustment that we took last quarter. So essentially the retail margin, excluding that adjustment, is flat. So stable on the asset margins.

Our deposit mix gave us some benefit, but obviously, offsetting that will be the rates and -- rates, margin compression and interest rate fell.

I think the guidance is, as we said before, 1.85% to about 1.87% without any further OPR cut. I think we'll be coming around that level for the next quarter as well.

Now on Page 13, now improving trading and insurance income are the drivers, you can see within our fee-based income. Now global markets and treasury market, thus said earlier, that has been positive in terms of its bond trading, its mark-to-market plus realized gain. Insurance businesses equally hedge of the investment of their premiums into bonds, they are also seeing that benefit in terms of bond price/value or yield compression as well as lower claims reserve.

Now the softer markets and lower corporate activities continue to affect our investment banking business. On top of that, the subdued equity market also weighed on the overall investment sentiments. And therefore we saw lower wealth management fee, dropping by 8% year-on-year.

Now Page 14 on expenses. I think from our perspective, is pacing really our investment versus our agenda as we see the revenue outlook. So we're remaining very disciplined on the cost control side, with operating expenses well contained, up 3% year-on-year. The walk on the bottom left is the expense growth driver, and we changed a few things. We essentially accrued more provisions much earlier on so that we avoid the kind of catch-up that we saw in Q4 last year. So that's part of the reason for the staff cost increase. The other reason, obviously, is that we had some one-offs last year, which are reversals of accruals, and we're also absorbing the pay rise that we gave to our staff. On IFRS 16, it's about MYR 2 million-plus. So on an annualized basis, it will be around just MYR 10 million to MYR 12 million on the new accounting standards that we adopted this quarter.

On Page 15, on the credit quality. On Page 15. Now a net recovery of MYR 32 million underpinned by net write-backs of around MYR 130 million. And we continue to work on other potential recoveries in the pipeline. We are very watchful as our asset quality and credit environment is much less benign. Now impairment [WACC] is to explain the top. So if you look at the positives, which are the greens, the first column on the top of the first bar is a MYR 57 million reduction in the Stage 1 and 2 position. Now that's mainly due to the improvement that we saw in certain sectors that we took on corporate accounts last year and therefore benefiting from the provision release. We also saw a slight improvement in the Stage 2 of the Business Banking, mortgages, Auto Finance and Cards, and therefore there is also a reversal of those provisions there.

On the individual allowance of MYR 36 million. We resolved one of our largest corporate NPL, and therefore there was a write-back of MYR 50 million. Offsetting that is also we took some provisions for new entrants to the NPL. And we took around MYR 25 million provision on those new entries.

Higher Stage 3, the 2 other negatives on the yellow bar, is a reflection of the net flow on the retail book into Stage 3. That is in line with our loans growth.

Now overall, I think the question is what do we see via the credit costs? And obviously, you do not extrapolate minus 27 basis points to repeat over the next few quarters. I think we sort of guided in the past, around 15 -- 10 to 15 basis points is where we think the credit cost this year could be. That is still at a relatively low level to the exposures that we want.

In terms of NPL on the following page, on Page 16. So if you look at the top table of MYR 1.673 billion, a few callouts.

The real estate component of our total NPL stuff is down 37%. One account where we received a large repayment and some write-downs of some of our other NPL within that sector has caused that reduction.

Mining, quarrying fell 31%. So again, there are some settlements of our oil and gas exposures of a few years ago. So that's a good outcome there for us.

And on a year-to-date basis, the new NPLs mainly were from residential properties; manufacturing, which is one specific account; trading and hospitality, one specific new entrant; and construction is basically there's 2 accounts that basically drove that kind of step up. So it's a handful of accounts rather than a large widespread duration.

On the sector-wise, in terms of oil and gas, construction as well as real estate. If you look at the exposure that we have there, they are pretty much in check. And essentially, there's not much change in those exposure levels in those 3 particular sectors that we've called out.

So moving on to the balance sheet on Page 17. The large corporate repayments in -- is being apparent in the wholesale sector. So wholesale banking loans fell 4% since the start of the year, particularly around the large corporates. Mid Corp, which is our growth engine, our focus area, I think loans have been broadly stable, just slightly down 1%.

Now Auto Finance, we haven't got an answer to reverse that trend. But certainly, the disbursement levels are much higher than when we came into this year, but it is still on a net decline of MYR 700 million.

Overall, there is a slight slowdown in our Q1 loans. And on the positive side, you can see the greens, is that the areas that we are targeting, it is still -- we're managing to achieve some growth in there.

Now on Page 18, around the deposit and the funding side. If you look at the top, that the overall deposit is down 4% to MYR 102 million. Now against the industry of about 1% step-up, as I have said earlier, that we were in a very, very liquid state. Our deposits growth outpaced loans last year. And therefore in Q1, we deliberately released some of the higher-cost term deposits in retail and wholesale just to reduce our excess buffers and manage our margins.

On the overall, if you look at the cumulative trend, I think we -- our total deposit base over the 3 periods that we show on the top bar is pretty much tracking on the industry level. On the right-hand side, I think CASA has been a focus for us. It's up 11% year-on-year. The 7% decline is due to hot money outflow. But cumulatively, we have gained market share over '18, '19 and quarter 1 of '20.

Finally, before we get to Q&A, just on Page 19 on capital. Capital level is stable, remains adequate. Our RWA efficiency levels between RWA-to-asset ratio stands at 66% or the same level. And for this quarter, there is no dividend payment at this juncture.

And before we poll for the Q&A, I think just summing up on the guidance and expectation and our scorecard on quarter 1 relative to where we guided when the ended last year, is that pretty much we're on track on many of the dials, in line with the target. Q1 does not make a trend, I just want to repeat that. And our reasonably first good quarter gives us the kind of improvement in the operating leverage. Sentiments remain like last year, I have to caveat that. And the downside is that slower loans growth is apparent. We're keeping a very watchful eye on credit portfolios and continue to execute on our priorities. And the digital initiatives are being invested in, but we are pacing that relative to income outlook, but also against the achievement of our BET300.

So I'll stop here and get into Q&A for the rest of the session. Thank you.

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Chelsea Cheng, AMMB Holdings Berhad - Head of IR [5]

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Hi, Amber, you may proceed to queue for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Robert Kong from Citi.

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Robert P Kong, Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions [2]

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Three questions from me. First of all, in terms of the NII and NIM. So you've given the guidance that you're still going to be around 1.85% to 1.87%, but 2 parts to that. I think one is if you do see a further OPR cut, which I think is looking increasingly the case given the outlook, then how would you adjust your NIM guidance?

Just related to that, is there any more room to manage out excess liquidity or more expensive deposits? I know that you're sort of in your optimal range now, but in a slowing loan environment, do you see room to actually manage that out further or should we just stay with what we have here?

And also related to NII. Do you see any pickup in intensity in loan competition? When you have lack of loan growth, sometimes the risk is that people try to gain market share, and therefore, you start to see the asset yield pressure.

So the second question is on asset quality. I know that you've talked about the write-backs and recoveries. I noticed that your regulatory reserve has gone up about 37% quarter-on-quarter. So your on-balance sheet loan provisions have dropped but your regulatory reserves have gone up, I think, a couple of hundred million. I just wonder if you could explain that.

And the third and final question is, could you discuss your thoughts or principles around taking on a digital bank license? I think it was quoted somewhere in the press that, that is something that you'd be willing to consider, actually launching your own separate standalone digital bank license. So any thoughts you can give around that would be very helpful.

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Fou-Tsong Ling, AMMB Holdings Berhad - Group CFO [3]

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Okay, Robert. I think I'll take the financial questions and Dato' talk about the digital side. So I'll do the borrowing stuff first and then Dato' will talk about the good stuff in terms of the license.

Now on NIM, 1.87%, 1.85% is our guidance. The OPR cut -- the potential for another OPR cut, I think, is really dependent on FOMC. As Dato' mentioned earlier, that our own in-house view is that there could be another one later on in this year, whether it's going to be before FOMC or the next MPC in November. A 25 basis points essentially transmits to something like 2 to 3 basis points on our net interest margin, it's around MYR 30 million on an annualized pretax basis. So that's the first aspect around the impact of the sensitivity of our book to a further cut in OPR.

Now is there room more for excess liquidity? I think we're traveling at the range whereby we could sort of eke out another 2% to be just under 100% on an LV basis, given the LCR is in a good space. Let's just wait and see. I think we are also looking to augment in terms of the sources of funding. Particularly if we feel that the bond inventory needs to be filled up, we might go more into the interbank market rather than just commercial deposits that are reinvested into the bond. So that's the other way of us trying to pick up yield on the carry trades when the loan demand is soft and also augmenting that without taking too much liquidity risk by going into the interbank market as well because that could be a [positive in a low loan environment].

Now in terms of loan competition, I think part of the margin compression, which perhaps I didn't point out, is if you look at the Business Banking business, that the asset margin compressed by around 3%, just slightly. I think the -- it's also -- if there's not much growth in the large corporates, I think the Mid Corp, that segment could come under pressure. We haven't seen it in the first quarter, but we're watching that, given that we have to price for risk. But we haven't seen that intensity in the -- in that segment increasing. It is already very competitive, but we have not seen that affecting our margins just yet.

Now on asset quality and the reserve movement. There is a requirement that the total regulatory reserve and ECL health must be at a certain minimum for Bank Negara, so it's 1% of total. So part of that adjustments is that we move into reserve is just to reflect that adjustment, given that we did see a big reversal to the P&L on our retail Stage 2 provisions. So that's just a clawback for the general reserve, that Bank Negara needs to have bank holding as a general provision buffer.

Now on digital banking license, Dato', just generally around the total of it.

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Sulaiman Bin Mohd Tahir, AMMB Holdings Berhad - Group CEO [4]

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Robert, thanks for that thing -- the question. Certainly, I mean, digital is a big piece that all banks are certainly considering and looking at. I mean whatever digital approaches that we are taking, clearly, we have always thought that, if you want to do it, we certainly want to do along the lines of how do we actually get or create customer value, I think as a result. It's not just about following, entering digital bank or creating digital bank unless you can serve a purpose. And clearly, there's opportunities out there in terms of where we can play in that space.

Now if you look at the broad level in terms of the kind of approaches that we look at it, I mean, digital enablement, digital improvement, is something that we must do. So if you look at within the bank itself, we have done a lot of digital -- new digital-enabled initiatives like AmOnline. We've gone from 20,000 customer base now to 800,000 active customer base. I think it's very good. We have done our cash management system for small business, big business. We do base book solution very well, we integrate digital solutions for our corporate customers. They're kind of straight-through processing that we've been using digital and robotics in terms of improving our processes. That's something that we'll continue to do, that kind of digital initiatives we do within the bank. So that's something that we say we will run the bank better by driving digital enablement.

And the second part is that there are certain areas, if you look it out there, that kind of underserved or unreached by us by virtue that the cost to serve is high. The issue here is can we play that role? I mean there's 2 ways to do it. One is you could work with people who are in the business, then how do we do a possible strategic tie-ups with the partnerships? We did some of those initially, not leading to a digital bank, but certainly collaborative, like we did with Maxis, Digi, PayNet, that something that could evolve into something as you go along the line.

Then the third current approach is that do we create digital bank for digital bank's sake? I don't think we are in that position to create digital bank for digital bank -- for that sake because unless we can really find clear value proposition. Certainly, our angle, and of course, this is subject to the regulatory approvals and everything else, it's really about looking at how do we work with these partners in terms of driving new initiatives or even possibly to creation of a new channel for us. So that's more the kind of thought process. But again, these are very preliminary and we are still in very early discussion stage. Certainly, if something comes out, it's something that we will make the proper announcement, obtain the necessary regulatory approvals.

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Robert P Kong, Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions [5]

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Maybe just to clarify one thing. Do you -- as sort of the banking community, do you have a dialogue with Bank Negara about what these digital bank regulations will look like? Because I think when I look at the digital bank rules that have come out across the region, it's clear that in some cases, the banks have had a fairly decent sway with the Central Bank in terms of, for example, not introducing even more irrational competition, focusing on underserved parts of the economy rather than the parts of the bank and so on and so forth. So I just wondered where you stand on that. Maybe you had some dialogue and you have some sense of what Bank Negara is thinking.

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Sulaiman Bin Mohd Tahir, AMMB Holdings Berhad - Group CEO [6]

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We have not come up with kind of specific, what you call it, guidelines with regards to what kind of licenses they will be issuing out and to whom and how, but more along the line of what we might see in proposals. And if you look at some of the things that they are looking at. I mean they wanted to -- more to see how they could get a look into areas where they could improve transparency and clarity along the lines, so particularly along the lines of unbanked group of customers because today, maybe -- some of those activities are driven through physical channels out there, maybe in terms of [NSLP] protection of documentation, clarity of information, maybe it's not there. And they would like to see the current initiative that gives a little better -- slightly on inflows and outflows of funds on this kind of businesses.

And because of that, some of the initial thoughts that you're seeing, which is along the lines of the legitimized public businesses. And digital is the way to capture those flows. And they think that they are -- they like to follow along the line of Hong Kong model. Meaning that what's required is really the requirements of the banking entities currently. They would like to make sure that some of these requirements in terms of capital, in terms of liquidity, in terms of set of rules that we have set for banks, are there, that be just the minimum.

And the kind of -- they're very favorable towards these entities tying up with banks, particularly operating banks in Malaysia, so we will look at it positively. There are currently general guidelines, but they would like to look at it at case-to-case. I think they're opening up the -- probably the application to come start in probably some time in the fourth quarter of this year.

So again, this is new. So we will see how it goes. We're also in discussion with them on the specific things that we could possibly work toward here.

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Operator [7]

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Your next question comes from the line of Harsh Modi from JPMorgan.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [8]

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I have a couple of questions. First on the LCR number. It went down quite dramatically Q-on-Q to 154%. 150% would've still a good number. But could you just explain what happened there, 39 percentage point in the quarter? And where should you be on that?

And second, could you just -- again, I think I missed that on new NPL formation, went up by MYR 500-odd million. What drove that? And how do we think about it going forward?

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Fou-Tsong Ling, AMMB Holdings Berhad - Group CFO [9]

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Yes, on LCR, Harsh, if you look at the end of last quarter, we were running quite rich, and most of our placements of our surplus liquidity is into the shorter end of the curve and therefore less than 30 days. And consequently, that sort of over-boosted the LCR at the end of the last quarter.

Now 154% is still way above where we set ourselves in terms of our own management action trigger, which is typically at around 110%, 120%. So that's really to cater for any kind of variability on that number to be above 100%. So we typically said that 120%, 130% is where -- our range is 154%, is still quite rich.

Now on the new NPL formation, I think if we sort of go into the Page 15 first. I think 16 million -- increase of MYR 1,621 million carries a net MYR 50 million increase. So if you look at the top right, between where the NPL formation is coming through. So those with the 3 light-colored bars are: Yellow is Business Banking, gray is wholesale and red is Retail.

So you can see that on your math is about $50 (sic) [MYR 50 million] more, about MYR 23 million in Business Banking, that's one particular account. It is in the construction-related sector. The gray, which is wholesale, is down MYR 63 million. There's a large paydown going in, that has with a net MYR 63 million reduction. But offsetting that paydown is also an increase of about MYR 90 million for one particular account, 9-0. And on the mortgage and auto being the 2 big buckets for retail, that drove the MYR 92 million.

There is also a seasonality aspect of Hari Raya in that quarter, whereby you do see that people who are not paying. And therefore, some of those slips down into 90 days past due and therefore flowed into NPL. So typically, that's also one aspect. I can't claim all of it is seasonality. We are also making sure that our vintage and our delinquencies on the underlying basis on those 2 sectors are continuing to be looked at. So that's the one on the question around NPL formation.

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Operator [10]

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Your next question comes from the line of Peter Kong from CLSA.

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Peter Kong, CLSA Limited, Research Division - Research Analyst [11]

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When we look at the residential properties, for example, if we look at the stress. And if you can just share with us in terms of vintage analysis, what vintages are this coming from? Is it those that were originated earlier when the housing prices were very high? Or is it more recent vintage?

And my follow-up question to that is that when you look at the portfolio, are these basically customers that probably have been more speculative, i.e. maybe they have more than 1 mortgage? Or are these really from those who have -- who is their first home and now they are kind of [having], which is more bread-and-butter demand?

And my other question, Jamie, would be you have resolved one large account. Maybe can I just get an update, if I have missed it, how much more of these larger accounts are you looking at? And what's the total value of that?

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Fou-Tsong Ling, AMMB Holdings Berhad - Group CFO [12]

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Peter, let me start with the housing market on -- is this speculative or not? I think that's more the question around the components of our residential property sector. Now I think for just the overall, now where is the book concentrated in? Largely, if you take rule of thumb, 60% of our mortgages are in the MYR 250,000 to MYR 750,000 range set in terms of gross loan composition. So 60% is in the MYR 250,000, MYR 750,000 range, that's the starter home, that is the upgraded aspects, yes? 20% to 25% is less than the MYR 250,000. So that's the other component. So you're talking about 80%, 85%, which is really the bread-and-butter stuff.

Now anything that is beyond that in terms of the next bucket up, it's around 8%, 10%, from MYR 750,000 to the MYR 1 million range. Again, these are young professionals and family homes, larger homes. So the speculative element is very little from our book. That's the aspects of our composition. Now that adds up in terms of the growth in PAT loans, percentages of the NPL of mortgages in those components. It's just quite representative.

Now I think the vintage question is we tightened early on this year and tightened some time last year, given that we have been growing mortgages quite fast. So part of the [4-by-4] is to kick-start the balance sheet growth, put the sales engine forward. And therefore, over the last 4 years, mortgages have really gained market share. So when we see the step-up in the kind of flow of delinquencies into the book, is that -- for the last 4 years, essentially, that's where the seasoning of that book, when we really kick-start that mortgage engine, is giving us the kind of NPL increase. So that's volume-driven.

Is there -- is that all new vintage? I think it's quite hard to say. If we look at the last 4 years, I think '17 was -- when we look at the season -- seasoning, '16, '17 is a little bit suspect, therefore we tighten in '18. And therefore, those early vintages are the ones that are feeding through in terms of our gross charge-offs.

On corporate. I think the resolution of one of them meant that there was a large pay down of about MYR 100-odd million, yes, it's a repayment. And we have MYR 50 million left on that one. So we didn't lose any money. And therefore, the provision of that were reduced.

I think the new entrant, which is -- I talked about earlier in Harsh's question is essentially where you look at some of the shareholder dispute cases or some of the active schemes coming up, we basically classified those although the debt is continually serviced. Those are just our overriding triggers to put them into the bucket and take provision early.

Now in terms of the stock, I think I would be giving away the game and say, well, how much more stock left? It depends on how much comes in on that. And if I were to sum up, what are we working on in terms of work in progress? I think when I sum up all the things that could potentially come through as positive, i.e., recoveries, and also sum up all the things that could be on the downturn, give us surprises or at least anticipation. I think net-net is about between MYR 50 million to MYR 100 million range of net positive. But obviously, that will require many things to happen with our clients and also many things that won't happen on some of the ones that we're looking on, on our watch list quite carefully.

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Operator [13]

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(Operator Instructions) We have a follow-up question from the line of Robert Kong from Citi.

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Robert P Kong, Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions [14]

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A simple question. Are you still looking at any potential divestments of any business units or any noncore assets that could help you on the capital side?

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Sulaiman Bin Mohd Tahir, AMMB Holdings Berhad - Group CEO [15]

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So as we have mentioned, we'll always be looking at -- such as we do acquisition of certain segments and certain products that we're aiming for, we always look at opportunities there are on businesses whom we feel -- we deem as kind of noncore, that doesn't complement the kind of strategy that we do. So that's still on the table and we will look at it. And then certainly when the time comes, and an opportunity arise, we certainly will make the necessary announcement here.

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Operator [16]

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(Operator Instructions) There are no further question at this time. I'd now like to hand the conference back to Ms. Chelsea. Ms. Chelsea, please continue.

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Chelsea Cheng, AMMB Holdings Berhad - Head of IR [17]

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Okay. Thank you, everyone, for joining the call today. Some of you, we see you tomorrow. See you again next quarter. Bye.

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Sulaiman Bin Mohd Tahir, AMMB Holdings Berhad - Group CEO [18]

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Thank you, everyone.

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Fou-Tsong Ling, AMMB Holdings Berhad - Group CFO [19]

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Thank you, everyone.

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Operator [20]

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Ladies and gentlemen, this concludes our analyst briefing for today. Thank you for participating. Please be informed that the replay of this teleconference will be available by 7 p.m. Malaysia time for 30 days. Kindly follow the replay instructions accompanying the e-mail invitation sent to you earlier. You may now disconnect.