KUALA LUMPUR (Oct 10): Affin Hwang Capital Research is maintaining a 'neutral' call on the banking sector, following details that emerged yesterday of the merger between CIMB Group Holdings Bhd, RHB Capital Bhd (RHBCap) and Malaysia Building Society Bhd (MBSB).

In a note this morning, Affin Hwang Capital Research analyst Tan Ei Leen said while the banking sector itself lacked re-rating catalysts in the second half of the year due to weaker trading/investment gains potential, moderating loans growth and a tighter liquidity situation, the merger would not add much excitement. 

"[This is] owing to the underlying risks as there are still stumbling blocks emanating from the Employees Provident Fund's (EPF) ability to vote in the merger and the reaction of other shareholders.

"We do not discount on potential equity capital-raising amounting to RM7.5 billion (related to the acquisition of MBSB) to beef up capital buffers and eventually other debt capital securities along the way, of which may cause funding cost to rise as well," she said. 

For sector exposure, Affin Hwang Capital Research said it favours Alliance Financial Group Bhd and Hong Leong Bank Bhd. 

Meanwhile, UOB Kay Hian Research is maintaining a 'market weight' call on the sector, saying Malayan Banking Bhd (Maybank) could be an indirect beneficiary of the proposed tripartite merger. 

"Given Maybank’s well-balanced portfolio between consumer, commercial lending and investment banking segments coupled with its government links, we believe Maybank could be an indirect beneficiary of any potential customer attrition emanating from the merger," said its analyst Keith Wee Teck Keong in a note. 

Wee is also of the view that the proposed acquisition is unexciting as MBSB's prospects are diminishing. 

"Even if the merged entity is allowed to maintain MBSB’s civil servants’ personal loan deduction codes, we note the recent macro-prudential measure by Bank Negara Malaysia to cap the maximum tenure of personal loans from 25 years to 10 years has severely stunted growth within MBSB’s personal loan segment, which has been the key driving force of the group," he said. 

"As the slowdown in personal loans is structural in nature, we expect growth moderation to continue to intensify, which essentially diminishes the appeal in MBSB’s prospects," he added. 

Wee also noted that the potential value of CIMB is now trending towards the downside. 

He said since CIMB shareholders would be receiving a large part of the consideration in RHBCap shares, and given that the return on equity (ROE) dilution of the enlarged merger entity was significant – the immediate-term value destruction that CIMB shareholders would face is relatively pronounced.

UOB Kay Hian Research has downgraded its call on RHBCap to 'sell', with a target price of RM8.

At 12.30pm, CIMB shares lost 28 sen or 4.01% to close at RM6.70 sen, while MBSB's share price gained 23 sen or 9.7% at RM2.60 and RHBCap's stock also rose 20 sen or 2.3% to RM8.90.