This article first appeared in The Edge Financial Daily on June 5, 2017

Banking sector
Maintain neutral call: AMMB Holdings Bhd and RHB Bank Bhd, which have obtained approval from Bank Negara Malaysia (BNM), will start talks for a proposed merger on an all-share deal.

If it materialises, the RHB-AMMB post-merger will become the fourth largest bank in Malaysia with an estimated asset of RM386 billion. Additionally, RHB-AMMB is expected to leap to the No 1 spot in asset management and general broking and to the No 2 spot in Islamic banking.

The market has been aware of such a potential merger as reported in some newspapers in March this yesr. As such, we are not entirely surprised by the move. We opine that this has been somewhat priced in by the market as seen in the run-up in AMMB share price.

The share price rally since the beginning of the year has brought the valuation of both RHB and AMMB closer to their respective book values.

Both the Australia and New Zealand Banking Group Ltd (ANZ) and Tan Sri Azman Hashim collectively hold 37.1% of AMMB shares.

Last year, ANZ pared down its stake worth RM760 million at 0.9 times price-to-book, as ANZ has been under increasing pressure from its shareholders back home to improve returns from its underperforming Asian assets.

Should the discussion go through, AMMB will require a special resolution of 75% of votes whilst RHB just needs a simple majority of 50% plus one share.

At this point, details are sketchy, but the management of RHB highlighted that the deal will only involve the issuance of shares for the acquisition of AMMB’s assets and liabilities.

We do see potential revenue synergies in terms of strengthening the commercial banking and investment banking business. However, there will be areas of duplication in terms of resources and customers as both are not market leaders. The new entity will create another competition instead of leading the market.

To recap, the average price-to-book value for the industry’s recent mergers and acquisitions (M&A) stood at 1.4 times with RHB Capital Bhd’s acquisition of OSK Investment Bank at close to 1.8 times and Maybank Investment Bank Holdings Sdn Bhd’s acquisition of Kim Eng Holdings Ltd at 1.9 times.

Deteriorating asset quality that will impact banks’ provisioning level and the high household debt will push consumer sentiments lower.

We keep our ‘neutral’ stance on the banking sector due to the modest growth outlook for earnings, loans and deposits in the environment of stable gross domestic product (GDP) expansion. The modest earnings growth will result in lower return on equity and lower the expected return. — Hong Leong Investment Bank Research, June 2