KUALA LUMPUR (June 8): The proposed merger between AMMB Holdings Bhd (AmBank) and RHB Bank Bhd is credit positive for AmBank Group’s main operating bank – AmBank (M) Bhd (Baa1/Baa1 stable, baa3), because its distribution, funding resources and systemic importance would benefit from being a part of a larger Malaysian banking group, according to Moody's Investor Service.
RHB Banking Group’s parent company RHB Bank Bhd (RHB, A3/A3 stable, baa38) and AmBank Group’s holding company AMMB Holdings Bhd (unrated) announced last Thursday, their 90-day exclusivity agreement to discuss a merger, pending regulatory approval.
Potential benefits to RHB are discounted by its likely operating challenges to rationalise the organisational structure and infrastructure of the newly-merged entity, Moody’s said in a note today.
“RHB’s integration of OSK Investment Bank Group (unrated) and other mergers involving Malaysian banks, suggest significant challenges, with the realisation of revenue and cost synergies occurring many years after integration,” Moody’s added.
In this case, revenue benefits will likely materialise, only after the merged entity incurs substantial restructuring expenses, Moody’s said.
“On a standalone credit basis, AmBank’s funding profile is weaker than RHB,” Moody’s noted, adding AmBank has a materially smaller market share of domestic deposits and lower percentage of low-cost current and savings account deposits in its deposit mix, than RHB.
“We expect the merged entity’s funding profile to be closer to that of RHB, and to gain from the larger scale of their combined and enhanced branch and customer network,” the note added.
Moody’s said the banks indicated the transaction would effectively be an all-share merger.
“The combination of the two midsize financial institutions would create Malaysia’s fourth-largest financial group by assets, with total consolidated assets of RM368 billion (US$86 billion), based on March 2017 financials,” Moody’s said.
“Furthermore, even as Malaysia’s fourth-largest financial group, we do not expect the merged entity to be in a significantly stronger strategic position, relative to the top three Malaysian banking groups. Malayan Banking Bhd (Maybank, A3/A3 stable, a3) and CIMB Bank Bhd (A3/A3 stable, baa2) have entrenched corporate relationships, while Public Bank Bhd (A3 stable, a3) has a longstanding leadership position in retail lending,” the note added.
However, Moody’s noted the merger would still enhance the scale of RHB’s operations in Malaysia, and give it access to customer and product segments with which AmBank Group has stronger ties.
The combined total assets of both AmBank Group and RHB would increase RHB’s assets by 1.6x, and AmBank Group’s assets by 2.7x, based on March 31, 2017 figures, Moody's said.
The merged entity would solidify its position as having among the largest branch networks in Malaysia, close to that of Maybank, it added.
“The merger will not significantly affect the two entities’ asset profile and capitalisation. Based on our pro forma estimates, the gross impaired loan ratio of the merged entity was 2.2%, based on March 2017 financials, compared with 2.4% for RHB and 1.9% for AmBank Group,” Moody’s said.
“On capital, we do not expect the proposed all-share transaction to result in significant goodwill that would negatively affect the capital position of the merged entity,” the note added.
At the end of March 2017, RHB reported a common equity Tier 1 ratio of 13.2%, while AmBank reported a ratio of 11.6% for the consolidated AmBank Group, Moody’s noted.