KUALA LUMPUR (Oct 13): The proposed merger between CIMB Group Holdings Bhd, RHB Capital Bhd (RHBCap) and Malaysia Building Society Bhd (MBSB) would be credit negative for CIMB Islamic Bank Berhad but RHB will gain substantially from the exercise, says Moody’s Investors Service.
In a report today, Moody’s vice president Eugene Tarzimanov noted that the merger would see CIMB Islamic Bank's asset size triple as a result of acquiring RHB Bank’s and MBSB’s Islamic operations.
“Although CIMB Islamic Bank would reap the benefits of a much larger Islamic asset base that would comprise around 20% of the total assets of the merged entity, it would also be exposed to MBSB’s weaker asset quality,” said Tarzimanov.
“Moreover, CIMB Islamic would face a higher cost base arising from the likely transfer of personnel and branches to the Islamic banking entity from the conventional banking entities,” he added.
This is due to the expectation that the so-called dual leverage banking model, whereby Islamic entities operate under the infrastructure of their conventional parent banks, will change, he said.
However, he also noted that more details about how management of the merged entity will execute this plan will determine the extent to which the additional cost burden will reduce the Islamic banking operation’s profitability and capital retention capacity.
Last Friday, Moody’s had affirmed RHB Bank Bhd’s A3 deposit and debt ratings, and the bank’s D+ bank financial strength rating, and changed the outlook on the A3 ratings from stable to positive.
Tarzimanov said RHB will derive a larger, more diversified, and financially stronger financial group from the merger, as it would benefit from CIMB Bank’s stronger standalone credit metrics and the “very high probability” of parental support from a financially stronger merged group.
“RHB Bank and MBSB would also benefit from a higher probability of support from the Malaysian government (A3 positive), because as part of the country’s largest financial group they would become more systematically important,” he said.
Tarzimanov, however, said the credit implications for CIMB Group and CIMB Bank are difficult to assess due to insufficient details about how the parties will execute the transaction and its ultimate structure.
Despite this, he noted there is limited risk that the combine entity’s capital adequacy will take a large hit because of goodwill.
“Indeed, the pro forma common equity Tier 1 (CET1) ratio of the merged entity would decrease only mildly to around 9% after the transaction because of goodwill from the 9.5% that CIMB Group reported as of June 30, 2014,” he added.
He also noted that CIMB plans some asset disposals to strengthen its CET1 ratio post-merger to up to 10%.
On Oct 9, CIMB Group announced that the three parties had agreed in principle to the key terms for the proposed merger, and an application was made to Bank Negara Malaysia to seek its approval.
It includes a share swap between CIMB and RHBCap, at an exchange ratio of 1 RHBCap share for 1.38 CIMB shares.
The ratio is based on a benchmark price of RM7.27 per CIMB share and RM10.03 per RHBCap share; translating into price-to-book ratios as at June 30, 2014 of 1.7 times and 1.44 times for CIMB and RHBCap respectively, a joint statement from the banks stated.
After the merger, CIMB shareholders will own 70% of the merged CIMB-RHB Group, and RHBCap shareholders the remaining 30%.
Meanwhile, CIMB Islamic, RHB Islamic and MBSB will merge to form a mega-Islamic bank, to be conducted at a price of RM2.82 per MBSB share.
MBSB shareholders will have the option of receiving cash or CIMB Islamic shares, as consideration.
As of 11.04am today, MBSB and RHBCap were among the top gainers on Bursa Malaysia.
MBSB was up 26 sen at RM2.63, while RHBCap rose 25 sen to RM8.95. CIMB, meanwhile, was unchanged at RM6.60.