Market relief on aborted merger

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KUALA LUMPUR: The market responded positively yesterday to news that discussions of the mega-merger between CIMB Group Holdings Bhd, RHB Capital Bhd (RHBCap) and Malaysian Building Society Bhd (MBSB) had been called off on Wednesday.

A bank-backed analyst told The Edge Financial Daily that while most banking stocks saw gains, this was most likely a spillover effect from investors buying into CIMB’s stock. But it remains to be seen if this would be a rerating catalyst for the sector.

Another analyst who declined to be named said the rebound in CIMB’s share price spoke for itself, when asked if the news was positive. The banking group’s shares rose 14.9% from a one-year low of RM5.18 as at Jan 12, 2015.

CIMB (fundamental: 1.35; valuation: 2.1) was one of the most actively traded stocks yesterday, gaining 16 sen or 2.78% to close at RM5.91 and RHBCap (fundamental: 1.5; valuation: 2.1) ended at RM7.75, 1.31% or 10 sen higher, while MBSB (fundamental: 1.2; valuation: 2.4) lost four sen or 1.85% to close at RM2.12.

At the same time, Malayan Banking Bhd closed 2.5% or 21 sen higher at RM8.60, Hong Leong Financial Group Bhd gained four sen or 0.24% to close at RM16.58, while BIMB Holdings Bhd rose one sen or 0.26% to RM3.92.

In a statement yesterday, Fitch Ratings said the move to call off the exercise reflected prudence on CIMB’s part, amid a “weakening operating and economic environment resulting in slower growth and banking sector asset quality pressures”.

The ratings agency deemed the merger as “ambitious”, as the process would have been lengthy and the inclusion of MBSB into the mix would have made the integration even more challenging given its different business mix to CIMB and RHBCap.

Fitch noted that the macroeconomic outlook for Malaysia has grown less certain amid the recent sharp falls in the price of crude oil as the country is a net oil exporter.

“MBSB’s focus on higher-risk personal unsecured lending — one of the areas most sensitive to a weaker environment — would have raised the risk profile of the new entity had the merger gone through, even though we believe the Malaysian banks are well placed to meet the challenges with strong loss absorption buffers,” it added.

Affin Hwang Research analyst Tan Ei Leen said she still sees provisioning risks for CIMB, due to headwinds from Indonesia and also for RHBCap due to a below industry impaired loan cover.

She said now that the mega-merger has been called off, the question remains as to whether other banks would be interested in a merger as well.

“We maintain our ‘neutral’ rating on the Malaysian banking sector given concerns of cascading macro risks on the economy from 4Q14 (fourth quarter of 2014) to 2Q15,” she said in a note.

Meanwhile, RAM Rating Services Bhd has lifted the “positive” rating watch on the RHB group’s banking entities, MBSB and RHB-guaranteed debt issues.

“Concurrently, we have reinstated the stable outlook on their ratings,” it said.

“The ‘positive’ rating outlook on RHBCap’s debt facilities has also been reinstated on account of the anticipated improvement in its gearing and double-leverage ratios,” it added.

 

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on January 16, 2015.