RHB takeover

Size matters to Malaysian banks

As Maybank and CIMB prepare to fight for RHB Capital, investors ask whether the resulting new banking group will be made of muscle or fat.
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Size matters in Kuala Lumpur (AFP)
<div style="text-align: left;"> Size matters in Kuala Lumpur (AFP) </div>

Malaysia’s two largest banks are getting ready for one of the country’s biggest ever corporate battles. Malayan Banking (Maybank) and CIMB, number one and two respectively, were given regulatory approval late on Tuesday to bid for RHB Capital, ranked number five. Size still seems to matter to bankers.

Size is also important for Bank Negara, the central bank, which is keen for a second round of consolidation in the industry as it allows more participation by foreign lenders in its domestic market. An earlier spate of government-led bank mergers in 1998 reduced the number of lenders from 54 to 10.

Bank Negara wants national champions, and CIMB has been quick to voice its support for that policy. Indeed, so far, that has been CIMB’s clearest articulation of the strategic reasoning for its interest in RHB.

“We believe that it is incumbent on us to engage in this opportunity to put forward a value-creating merger between the two banks and support the national banking consolidation agenda,” said CIMB’s group chief executive Nazir Razak in a statement following the announcement. Razak is also the brother of Malaysia’s prime minister Najib Razak.

A takeover by Maybank would create a banking group with assets of M$513 billion ($170 billion), and one by CIMB would have combined assets of M$405 billion, based on end-March 2011 data. RHB’s asset size on that date was M$133 billion.

In a separate statement, Maybank said the “potential transaction, if it materialises, would be consistent with Maybank’s vision to become a regional financial services leader, and support its strategic objectives of being the undisputed No. 1 retail financial services provider in Malaysia and the leading Islamic bank in Asean”.

An enlarged Maybank would be worth about $28.8 billion, putting it ahead of the region’s biggest bank, Singapore’s DBS Group, which is valued at $27.7 billion; the combined market capitalisation of CIMB and RHB would be around $27.3 billion based on current share prices.

But, apart from bulking up or acting as a spoiler against foreign intruders, at this stage it is hard to see what benefits a merger will bring. 

CIMB’s major shareholder Khazanah Nasional, the country’s sovereign wealth fund, said it supported a CIMB-RHB merger as long as it created value, according to local media.

Fitch Ratings said RHB’s ratings (BBB/stable) might benefit from a merger with either Maybank (A-/stable) or CIMB (BBB+/stable), given the stronger credit profiles of both acquiring banks. The buyer might also improve its regional position.

Yet, according to a report by Fiona Leong, Citi’s Malaysian banking analyst, there are likely to be few synergies. In her view, “the jewels in RHB Capital are its new retail banking model, Easy by RHB, as well as its close working relationship with its major [45%] shareholder the Employees Provident Fund”.

However, Maybank and CIMB, in addition to large corporate and investment banking businesses, already have substantial consumer banking operations too. “There would be overlaps in customer segments as well as duplication and redundancies in branch network and human resources,” she wrote. Redundancies would take some time, she added, bearing in mind the government’s normal reluctance for “staff retrenchments”.

The arithmetic doesn’t look too impressive either.

Although no pricing details or financing structures have been proposed at this stage, Leong’s initial estimates are that a merger with RHB would dilute earnings-per-share by 7% for both Maybank and CIMB. Assuming the target is priced at M$9.95 a share, and that RHB minority shareholders including Abu Dhabi Commercial Bank (reluctant owner of 25% of RHB) want cash, then the acquirer would need to raise at least M$11.83 billion, made up partly of new shares and M$5 billion in subordinated debt or hybrid capital securities.

Other ratios would also be negatively affected. Maybank’s return-on-equity (ROE) would fall from 15.5% to 12.8%, and CIMB’s from 17.5% to 14.2%; meanwhile, tier-1 capital ratios would drop to 9% from 11% for Maybank, and to 8.5% from 11% for CIMB.

In addition, Leong suggests that price-to-book (P/B) valuations might need to be re-rated due to the possible declines in ROE. She pointed out that historical P/B trends closely track banks’ ROEs, which indicates that, based on her scenario analysis, Maybank (trading at 2.3 times book value) and CIMB (at 2.7 times book value) could de-rate to 1.7 times book value. That would mean a fair value of M$7.76 for Maybank shares and M$6.50 for CIMB shares.

This would contrast with the surge in Hong Leong Bank’s share price after confirmation of its takeover of EON Capital a few weeks ago; but, its financing structure was positive for EPS and neutral for ROE.

The announcements by Maybank and CIMB came amid an auction process conducted by Abu Dhabi Commercial Bank, which is selling its 25% stake in RHB. Japan’s Sumitomo Mitsui Financial Group and US private equity firm Carlyle had expressed interest, but the status of that auction is now unclear.

The price of RHB shares jumped 12.8% to a record high on Wednesday, and closed at M$9.9, up 7.4%. Meanwhile, CIMB shares slipped 0.2% and Maybank dropped 1.6%.

The two potential bidders have been treated quite differently by investors. CIMB shares have risen 179% during the past five years, compared with a 15% increase in Maybank’s stock price, according to Bloomberg.

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