The Three Numbers That Toughen AMMB Banking Berhad

It began life in 1975 as Arab-Malaysian Development Bank. Today it is known as AMMB Banking Berhad (KLSE: 1015.KL; KLSE: AMBANK) or just AmBank.

In common with most banks, AmBank boasts a respectable Return on Equity. At 9.6%, the bank generated MYR9.60 on every 100 ringgit invested by shareholders last year.

By way of comparison, the RoE for DBS Group (SGX: D05) was 10.9%; OCBC (SGX: O39) was 11.2%; while that of Malaysian peer, Maybank (KLSE: 1155.KL; KLSE: MAYBANK), was 13.1%.

AmBank’s high Return on Equity can be explained in part by its high Net Income Margin of 40.0%. It implies that the bank made MYR40 on every 100 ringgit of revenue generated. Revenue in this case is the interest it charged on loans less the interest it paid on deposits, plus the gains it made on trading activities.

AmBank’s Asset Turnover is low. But that is only to be expected because bank loans are classified as assets. Its Asset Turnover is an unremarkable 0.029. In other words, it generated MYR2.9 on every 100 ringgit of assets. The Asset Turnover Public Bank (KLSE: 1295.KL; KLSE: PBBANK) is an equally unremarkable 0.026.

AmBank makes use of Leverage – lots of it. Its Leverage Ratio was 8.3. Thing is every dollar that is deposited at the bank is effectively a liability. That’s because every dollar that is put into a savings or current account is treated as a loan to the bank.

By dismantling the Return on Equity for AmBank, it is easy to see why the bank is strong. Its RoE of 9.6% is the product of a mouth-watering Net Income Margin of 40.0%; a low Asset Turnover of 0.029 and a hefty dose of Leverage of 8.3.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.