FOR the mid-tier and smaller banks that are competing against the giants of the industry, it's all about fighting fit and staying in the game.
It's muscle versus agility. It's about competing in their own way while looking to grow the business.
In some way, AMMB Holdings Bhd through its unit AmBank Group, has been doing that. Its group managing director Ashok Ramamurthy is in the gym five days a week keeping fit for personal reasons. The physical regiment will give him the energy that will come in more than useful especially when the country's fifth largest banking group has added some key businesses to its stable.
Having freshly acquired Kurnia Insurans in September last year and the MBF Cards business in December, it is about preservation and growth.
“Being in the top 5 is important to stay relevant. If we can grow bigger we will but we have to do it in ways that we preserve shareholder value. It's about the sustainability of growth,” he tells StarBizWeek.
Ashok, who chairs on the committees looking at the integration of those new businesses into the group, says AmBank is doing what it can to keep its position.
The acquisitions of Kurnia Insurans and MBF Cards allows it to get bigger in the markets that those businesses operates in and at the same time boost the bank's return on equity. The bank emphasises on efficiency and productivity and is among the top three in Malaysia in terms of the cost-to-income ratio.
“Scale gives you some advantages. If you are a bank like AmBank with a large domestic focus, you cannot afford to fall significantly behind in scale at a time when you are trying to invest in the business.
“The two go hand-in-hand. Your ability to invest in business requires you to fight harder to retain your scale and relevance in the marketplace,” he says.
AMMB in September paid RM1.63bil to buy Kurnia Insurans, which helped position the banking group as the largest general insurer in Malaysia.
That acquisition adds to the ROE of the group and improves the non-interest income component of its financials, a key aspect Ashok pays close attention to.
“When we began the journey, non-interest income used to contribute about 20% to total revenues. That was at the end of last year. This year it will be about 30% about 32% to 33% odd percentage. Strategically we'd like to get that to 40%. Generally non-interest goes directly to your bottom line and is not as capital intensive.
“If you think about Malaysia's landscape and in Asia where margins are coming off, we need to replace that either with lending growth which we have said we would not like to do aggressively or with other activities which help us with non-interest income,” he says.
Apart from growing segments like forex which boosts non-interest income, the acquisition of Kurnia Insurans and MBF Cards will help in changing the profit profile of the group.
“One of the things in general insurance that's not well understood is that it gives a ROE that's higher than what the group makes. In a pure mix sense it adds to ROE. It's a tariff market.
“In 2015, general insurance will go into a de-tariff world and you need scale for it. You need scale in a period where pricing might come under pressure when you are picking the right customers to come to you.
“You can have risk-based pricing tools which you can develop and that gives you insight into how you can price different customers for risk. And scale gives you a bigger database of information to leverage and do that well. General insurance globally gives you a ROE that's lower than banks but in Malaysia it gives you higher,” he says.
Ashok says with Kurnia Insurans in the fold, AmBank Group is now the clear number one in motor insurance in the country where almost one quarter of the motor insurance business in the country now falls onto its lap.
“We do have a niche-based commercial insurance strategy. The Kurnia acquisition doesn't particularly strengthen us in that space so there is more work we need to do organically to grow it and in time who knows what will be available for us to look at in the insurance side to strengthen our commercial business,” he says.
The group in January paid RM245mil to buy back a 30% stake in AmLife Insurance Bhd and AmFamily Takaful Bhd from Friends Life Group.
Ashoks says the buyback went smoothly as there were ties between both companies. An information memorandum for prospective new investors in the two companies was planned to be issued in the past week.
As for growing the credit card business, AMMB paid RM623.4mil to buy MBF Cards, and fits into its strategy of growing the group's non-interest income.
The deal brings about a lift to the acquiring and the issuing side of the business. Ashok says that in the acquiring portion where it targets merchants, AmBank Group will be in the top 3 on the issuing front, having MBF Cards will make the group a stronger number 6 in credit cards and inch it closer to number 5 after the acquisition.
“Merchant acquisition is very low in terms of capital requirements and gives you good ROE even at fine margins people make in Malaysia. Issuing business globally generally gives you good ROE as it does in Malaysia. It's not a rapidly growing part of the portfolio because you always find that given the consumer loans to GDP ratio, it's historically grown at 3% plus. It's not going to be a rapidly growing business for us but it gives us scale of a good ROE business,” says Ashok.
A plus point is that the acquisition of MBF Cards brings with it a 33.3% shareholding in Bonuskad Loyalty Sdn Bhd, or better known as BonusLink.
“It has a database of 7 million and even if you assume a fraction of that can be tapped into for us, that will add value,” he says.
MBF Cards will be rebranded using the AmBank brand and for Kurnia, the group is going to keep that brand.
“In general insurance, a multi-brand strategy works well. What it gives you is the ability to pick and choose the brands you want to use in particular channels without cannibalisation. Who knows, we might create more brands over time.”
Not finished yet
Reports have linked AMMB and Affin Holdings Bhd as suitors to buy Hwang-DBS (M) Bhd. Ashok would not comment on specifics as he is bound by a confidentiality agreement.
“What we've generally said historically is that there used to be a perception that we would not participate in mergers and acquisitions. In the industry we've always said as long as we see value, we will. If there's value, we will take a look at it. But I can't comment on specific deals,” he says.
But going after an equities brokerage makes sense for the AMMB group.
It says it is ranked among the top 3 investment banking houses in the country with a strength in the debt capital market.
The one thing that has been missing has been a strong equities business which Ashok says is a differentiator between institutional and investment banking.
“Calling yourself an IB would mean you need to have a reasonably good equities business. Part of the diversification is equities and we are not bad in equities. We are number 6 or 7. Five in some aspects and 6 or 7 in others. We will like to be in the top 5.
“In IB, anything to do with debt, we are clearly out there. Whether it's fixed income or funds management, we are in the top 2 but anything to do with equities, we are not that strong so we need to do more over time and become stronger,” he says.
Should AMMB land Hwang-DBS or any other broker down the road, the pressure that will put on its capital position would also depend on how the sale of a stake in its life insurance business, and the ensuing money it receives, proceed.
AMMB could do a dividend reinvestment plan but Ashok feels any decision to execute one will depend on the pursuit of more acquisitions.
“It depends. On the life insurance side, all possibilities are still on the table. We are in the early stages of that process and we don't know where we will end up with. Depending on the options, we may have more capital than we need or need more than what we have,' he says.
Rebalancing its portfolio
The banking group in the past had a portfolio of loans that were heavily skewed towards retail loans. At one point it used to account for 75% of its assets and efforts to bring about more balanced was undertaken.
Retail loans are not at 60% of its loans and Ashok is looking at a ratio of 50:50 between retail and non-retail loans. That target is a reflection of banking in Malaysia in terms of the percentages of the two segments.
“We were just too dependent on one part of our portfolio and did not have enough diversification. It was not that we did not want grow the retail side but we had to strengthen non-retail in the diversification sense. In doing so, we did not say we will do whatever it takes but we still focus on the right sectors. If it's a strong sector, we'll do more of but if its a weak sector we'll focus on the strongest players in that sector,' says Ashok.
One aspect where the banking group has seen traction is growth in business loans and the ongoing Economic transformation Programme has aided in balancing its loan portfolio. It's still not where Ashok wants it to be but the mix is heading that way.
“Logically speaking, in the corporate and institutional banking given our history in investment banking we should be in the top 3. We are not yet there. We are in the top 5. We have a large number of relationships in the past which we have never gone after and banked. Increasingly we have gone after that and we have made surprisingly inroads even into sectors which are linked to the government, where typically you would have expected one of the GLC banks to get it.
“All these single customer limits mean that given the sheer size of the economic transformation programme no one bank can bank it. Hence, you will see more syndications, syndication-based or bi-lateral activities happening that will happen between banks in a way of being able to fund those transactions and taking it to the capital market. The ETP has been good for the economy, the banks and for us but we can still do more,” he says.
Consolidation in Malaysia
Ashok believes Malaysia is overbanked. Especially when compared with Australia and thinks over time, the industry here will head towards connsolidation.
Large banks offer an ability to grow and gives rise to better preservation of capital. Investments can be made easier and being small doesn't put pressure from another viewpoint. It's not that any banker will want to do so but small banks cannot afford to make mistakes.
Given his hypothesis of consolidation in Malaysia, Ashok wants AmBank to remain standing when the dust settles.
“I believe AmBank will be a standalone bank for the following reasons. First is the super-regional strategy for ANZ means they have to be in Malaysia. Their options are limited. Starting something from ground up in a market where they have a reasonable partner is going to be very hard for them to do. And they have said they are happy with the partnership. My personal view is that they are here to stay.
“As long as we have a strategic partner with a reasonable stake and a longer term perspective, I don't think we will be a takeover target.
Then the question is whether we will participate in the consolidation phase that may happen over time. Will the shareholders both Tan Sri Azman Hashim and ANZ support that? You have seen in the recent past we have done a few (acquisitions) and there are more which we may be able to do.
“That has not been a constraint for us. We need to continue to evaluate every opportunity to ensure it is value additive to the group. If it is, I don't think shareholders or capital is going to be a material constraint. We will be allowed to participate in that. We will probably be part of the consolidation process as an aggressor, a predator as opposed to the prey.”
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