The Q & A session with AmBank about what to expect

By Devanesan Evanson

 

LAST Friday (Feb 26), AMMB Holdings Bhd (AmBank Group) dropped a bombshell in the market with the announcement of a RM2.83 bil settlement with the Malaysian Government in relation to the historical transactions involving 1Malaysia Development Bhd (1MDB) and its related entities.

This was unprecedented for the country and is probably the largest such settlement by a banking group in Southeast Asia.

The RM2.83 bil amounted to 94 sen of AmBank Group’s book value per share. This provision will be reflected in its 4Q FY2021 results which is expected to push the group into the red for its financial year ending Mar 31, 2021 (FY2021), according to analysts.

As a result, there will be no final dividends distributed to shareholders for FY2021.

Subsequently, AmBank Group reached out to the Minority Shareholders Watch Group (MSWG) this Tuesday (Mar 2) to address our questions and concerns.

It is commendable that the group was proactive in reaching out to the financial community, its shareholders and other stakeholders.

We understand that over the last weekend and the additional two-day of trading suspension, AmBank Group had reached out to 40 to 50 stakeholders to allay their concerns and address their questions.

Who should be held accountable for the settlement?

During the meeting, MSWG questioned the bank on who should be held accountable; from whom should retribution be sought; and who within AmBank Group over the years should be held accountable.

We also asked if there was a breach of fiduciary duty by some or all the directors at the material time; and whether action would be taken by the bank to recover the settlement amount or at least a portion of the settlement amount.

AmBank answered that they are reserving all their rights to take action against those involved. The decision on the option to pursue will be one that will be decided by the board.

Devanesan Evanson

At least five levels of governance structures and processes will be involved – the compliance function, the risk function and the risk management committee, the internal audit function and the audit committee, the CEO and the C-suite, and finally the board and the independent directors.

Surely, some of them should have, could have or would have highlighted the risks and consequences of carrying out such transactions. Was it a case of board/management overriding the controls embedded in the governance structures and processes? AmBank Group should indulge in much self-examination as to what happened.

The RM2.83 bil settlement which is about 30% of AmBank’s market capitalisation of RM9.52 bil before the announcement will put a dent on its bottom-line.

Shareholders, too, will be affected as share prices plunged and there will be no final dividends for FY2021.

There must be accountability; it is not as simple as just stating “let’s just put this behind us and move on”.

Two-day suspension on trading

We also asked about the need to suspend the counter for two market days given that the announcement regarding the settlement was not a complicated announcement that required two market days to digest.

It is the responsibility of a stock exchange to ensure continuous trading so that shareholders can better manage their risks by exiting/entering in a timely manner. Given the bombshell, some minority shareholders may have wanted to “get out” as soon as possible.

AmBank explained that one of the reasons for the two-day suspension was to reach out to the various groups of stakeholders to quell their concerns. We understand that AmBank Group had reached out to at least 40 to 50 stakeholders thus far.

And given the unprecedented quantum of the settlement and its material impact on the group, the bank felt that the two-day suspension was warranted to address concerns. Obviously, the exchange concurred with AmBank’s views.

Now with hindsight, we also realise that the shareholders may have benefited from reading the various research reports and recommendations during the two-day suspension period and as such, be in a better position to make an informed decision.

Settlement announced out of the blue

Our other question was on the suddenness of news of the settlement. There was no pre-warning, profit guidance or note of a contingent liability; there was no inkling at all.

AmBank informed that robust discussions on the settlement took place in early February 2021 and it was only given “a few days” to negotiate the settlement.

There does not appear to be any evidence of leakage of news of these discussions in terms of share price and volume movements and arguably, making an announcement without a final figure may have impacted the fair and orderly trading of the shares.

The two-day suspension can only be justified by the sheer size of the unprecedented settlement.

Allegations of insider trading

Amid all this, there has been allegations of insider trading on the stock from December 2020 onwards. Insider trading is a serious offence under the Capital Markets and Services Act 2007. It creates an unlevel playing field; and this is not fair on minority shareholders.

The Securities Commission (SC) will probably be looking out for abnormal or abrupt trading patterns by the insiders.

The SC is likely to be interested in asking for the motivation and rationale for some of these trading patterns. At this point in time, the issue of insider trading is mere allegation; we should let the regulator do their work.

What should minority shareholders do?

Based on the meeting with AmBank, we were given to understand that the settlement with the Government is full and final in relation to the legacy issues.

There will be no final dividends for FY2021. There is a need for the bank to restore its core equity tier 1 (CET1) ratio that will decline to 11% after the settlement from 13.5% as at the end of December 2020. This may affect future quantum of dividends.

Furthermore, there are possible revisions to Ambank Group’s corporate credit rating and the financial institution ratings of its banking subsidiaries by the credit rating agencies. A downgrade in credit ratings will increase the cost of capital for the bank.

As expected, on lifting of the suspension, the share price fell to accommodate the negative news.

Minority shareholders are advised to read the bank’s press release in full. They should also read the available research analysts reports and their recommendations.

According to Bloomberg, as of Mar 3, there were six “sell” calls on AmBank, four “buy” recommendations, and seven “hold” calls.

Macquarie which has an “underperform” recommendation on AmBank, pegs the lowest target price of RM2.50. Meanwhile, TA Securities Holdings Bhd and KAF-Seagroatt & Campbell Securities Sdn Bhd, both of which are recommending their clients to buy AmBank shares, have the highest target price of RM4.

This clearly shows that there is no consensus recommendations on the stock even among the research analysts.

Obviously, there is no simplistic recommendation as to whether to buy, sell or stay invested. It would all depend on the minority shareholders risk appetite and how they view things. – March 6, 2021

 

Devanesan Evanson is the CEO of the Minority Shareholders Watch Group.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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