KUALA LUMPUR (Oct 2): Malaysia Building Society Bhd's (MBSB) planned merger with Bank Muamalat Malaysia Bhd is expected to create a financial services entity with a collective asset size of some RM60 billion.

Affin Hwang Investment Bank Bhd wrote in a note today that MBSB and Bank Muamalat's assets were valued at RM41 billion and RM22 billion respectively. DRB-Hicom Bhd holds a 70% stake in Bank Muamalat while Khazanah Nasional Bhd has 30%.

Affin Hwang said, "It is still preliminary and there could be potential write-offs of the loan book subsequent to due diligence exercises, which is likely to follow suit. In our view, the objective of the merger is to enable MBSB to change its business direction and expand as a banking entity."

"We are not too optimistic [about] the merger, as previously there have been other merger discussions between Bank Muamalat and other parties that were unsuccessful," Affin Hwang said.

Affin Hwang said earlier merger talks involving Bank Muamalat were unsuccessful due to "asset quality risks".

On MBSB, Affin Hwang said it maintained its "hold" call for the stock with an unchanged target price (TP) of RM1.80.

Shares in MBSB and DRB-Hicom rose among Bursa Malaysia's top gainers on news that Bank Negara Malaysia has approved the merger negotiations.

MBSB jumped as much as 16 sen or 11% to RM1.67 before narrowing gains to RM1.63 at 10.19am. At 11.07am, MBSB was the sixth-largest gainer on the exchange.

At RM1.63, MBSB has a market capitalisation of RM4.63 billion.

DRB-Hicom rose as much as nine sen or 7% to RM1.42. At 11.12am, the stock pared gains at RM1.40 for a market value of RM2.71 billion.

Public Investment Bank Bhd said it was keeping its "outperform" call on DRB-Hicom shares with a TP of RM2.17.

Commenting on the deal, Public Investment said DRB-Hicom derived 7.7% of its revenue from the banking segment for financial year ended March 31, 2015.

"Going forward, potential disposal of 30%-stake in Bank Muamalat will reduce the services segment earnings," Public Investment said.

(Note: 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.)