KUALA LUMPUR (Oct 31): CIMB Group Holdings Bhd management is estimating that the post merger integration with RHB Capital Bhd (RHBCap) and Malaysia Building Society Bhd (MBSB) to cost about RM1.4 billion, with an 80:20 split between capital expenses and operating expenses.

"As such, it could be just RM280 million which needs to be immediately expensed off, which is not too far off our estimate of RM313 million," said Maybank IB Research in a report dated Oct 29.

The research firm had met with CIMB management recently.

"What was new from our meeting with (CIMB) management was that some of the excess costs and branches will be transferred to the mega Islamic bank, and CIMB intends to hold just 51% to 60% in the bank after the merger.

"This means the Islamic bank will operate a hybrid model with branches, instead of a fully leveraged one," said Maybank IB Research.

It added that the CIMB-RHB-MBSB merger continues to progress on and at this stage, CIMB management is preoccupied with addressing Bank Negara Malaysia’s queries while proceeding with due diligence. 

To recap, the merger prices CIMB, RHBCap and MBSB at a June 2014 price-to-book ratio (P/BV) of 1.7 times, 1.4 times and 1.9 times respectively.

Maybank IB Research said this gives rise to a goodwill of about RM8 billion for RHBCap and RM3.6 billion for MBSB. "We estimate a 0.9 percentage point decline in CIMB’s FY15 return on equity to 11.4% from 12.3% post merger."

The research firm said its "hold" call and target price on CIMB's stock of RM7.60 remain unchanged for now, the latter pegged to a FY15 P/BV of 1.35 times. This offers a 23% upside to CIMB’s current share price.

"We do already have a "buy" call on RHBCap, with a RM10.45 target price, for exposure to this merger.

"Based on the swap ratio of 1.38 CIMB shares for every one RHB share, CIMB currently provides for slightly cheaper entry, given that at RHB’s current share price of RM8.74, CIMB should be valued at RM6.33 (a 2% upside to current price)," said Maybank IB Research.