Not banking on much M&A upside for AMMB

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AMMB Holdings Bhd
(Oct 7, RM6.84)
Maintain sell with unchanged target price of RM 6.70:
Despite the speculation on mergers and acquisitions (M&A) surrounding AMMB, we believe the share price performance is likely to remain lacklustre as: (i) any potential M&A valuation will likely value AMMB within the 1.6 to 1.7 times price-to-book value range, which implies only a mild share price upside of 2% to 6%, and (ii) immediate- to medium-term operating headwinds remain highly challenging for the group.

There has been renewed speculation that AMMB’s major shareholders, The Australia New Zealand Banking Group Ltd (ANZ) and Tan Sri Azman Hashim, have been scouting for potential suitors for their respective 24% and 18% stakes in AMMB but there has been little interest from potential local suitors . Speculation of ANZ wanting to sell down its banking minority stakes exposure in Asia is due to concerns that stringent Basel III capital deduction on minority interest stakes would impede its ability to meet its Tier-1 capital target, which is currently set at 9%.

We believe RHB Capital Bhd and to a certain extent CIMB Group Holdings Bhd may be open to an M&A with AMMB from a commercial and retail banking portfolio synergistic potential. AMMB has a stronger auto dealer network than CIMB and RHBCap, and from a commercial and business banking perspective, AMMB may have a relatively stronger client base within the mid-market segment compared with CIMB and RHB Cap’s larger corporate client bases. However, this is only if the merger between CIMB and RHBCap does not materialise. We do not believe that other banks such as HLBank and Public Bank would be interested. HLBank has a disciplined pricing strategy and would not be interested in AMMB’s auto-centric loan portfolio.

Public Bank’s track record has shown that its domestic focus is more on organic growth rather than via M&A coupled with the fact that it would not be interested in AMMB’s corporate and investment banking franchise. As for Malayan  Banking Bhd, there is much duplication in terms of portfolio mix with AMMB, while management has stated that any potential domestic acquisition has to be synergistic from a pricing and operational standpoint, and not for the sake of scale.

Maintain “sell” and target price of RM6.70 (1.43 times financial year 2015 [FY15] forecast price-to-book value, return on equity: 12.1%). Moderating loan growth, rising provisions and persistent net interest margin pressure are likely to cumulate to a 7% year-on-year contraction in core FY15 earnings. — UOBKayhian, Oct 7


This article first appeared in The Edge Financial Daily, on October 8, 2014.