By Stephanie Jacob
A potential three way merger between CIMB Group, RHB Capital and Malaysia Building Society Bhd (MBSB) would be value destructive, according to brokers UOB Kay Hian.
A three-way merger between the three banks would create Malaysia’s largest banking entity surpassing Maybank in terms of loans and deposits base by roughly 9%, the broker said. The three companies announced a suspension of their stocks from trading yesterday.
It was reported that this may be a prelude to an announcement today that the groups are planning to merge. Technically, they would then have to seek permission from Bank Negara Malaysia to enter into merger negotiations.
“Although we cannot discount the possibility of a CIMB-led three-way merger between RHB Capital and MBSB, we opine that such a merger could be value destructive to the merged entity given the degree of operational and revenue duplications between CIMB and RHB Capital coupled with the fact that both banks continue to struggle with respective post-merger and acquisition integration costs resulting in both banks having among the highest cost-to-income ratios (CIR) in the industry,” UOB Kay Hian said.
It added that CIMB and RHB Capital not only had similar portfolio mixes and strengths, but were also shared similar weaknesses.
UOB Kay Hian noted that the areas that CIMB needed to work on such as operational cost efficiency, stronger core deposit franchise, small medium enterprise banking and trade and auto financing, were also RHB Capital’s weaker spots.
Furthermore RHB Capital’s subsequent acquisition of OSK Investment in May 2012 would likely have raised the degree of duplications.
Although a potential merger should help reduce CIMB’s cost-to-income ratio (CIR) from 56% to 53% given MBSB’s relatively low CIR of 22%, it also might raise the enlarged group’s CIR further given the lack of revenue synergies between CIMB and RHB Capital, along with the associated integration costs involved.
It highlighted that CIMB has rejected the option to acquire RHB Capital in the past because of the perceived lack of synergistic benefits.
UOB Kay Hian also highlighted that any acquisition of RHB Capital would not be cheap, as any buyer would likely have to match Aabar Investment’s expensive entry cost into the bank at RM10.80 per share. This translates into a valuation of 1.5x financial year 2014 price-to-book value on the back of its below industry return on equity of 10.8%.
“Such a merger could potentially cost CIMB in excess of RM35b, nearly 58% of its current market capitalisation and potentially incurring a goodwill in excess of RM15b that would result in its core tier-1 equity ratio declining by 4.8ppt to 6.1%,” noted the broker.
PublicInvest Bank (PIVB) meanwhile noted that should a three-way merger be on the cards, then pricing is the key factor to consider.
RHB Capital valuations currently stood at about 1.29x its book value as at Mar 31, 2014, and that for its shareholders to be interested in the merger, a higher offer of 1.5x would likely be more acceptable. This would value RHB Capital at RM10.12 per share which is a 16% premium to its closing price of RM8.72.
The broker also noted that any price would have to palatable to Aabar Investment which owns 21.4% of RHB after paying RM10.80 per share in June 2011. However given that Aabar has also already received a cumulative dividend of 58 sen since its initial investment, it might see a share swap deal as being positive given it might benefit any price upside from the merged entity.
Overall PIVB said that it was positive over the move and was reiterating it ‘outperform’ call on the counter at a target price of RM8.
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