Banking sector
Maintain “neutral”: We still advise investors to return to fundamentals, whether the CIMB Group Holdings Bhd (CIMB)-RHBCapital Bhd (RHBCap)-Malaysia Building Society Bhd (MBSB) merger is on or off.

We would take profits on CIMB and RHBCap should their reratings continue, but we think the opportunity should be short-lived.

We still like MBSB, despite the negative reaction to the share price.

In this report, we look at the potential impact on the share prices of CIMB, RHBCap and MBSB under the scenario that the three-way merger is called off, as indicated in a Bloomberg news report on Tuesday.

We believe that the current

rerating of CIMB’s share price may not last, as the group’s prospects should be weakened by headwinds from Indonesia.

However, if we assume a 10% discount to the stock’s price-to-book value (P/BV) multiple prior to the merger, it would equate to a P/BV multiple of 1.35 to 1.4 times, or a hypothetical merger share price of RM6.27 to RM6.50.

At the hypothetical levels, we would consider taking profits.

As we believe market expectations about the merger may taper off, we retain our “hold” rating and target price (TP) of RM5.

Similarly, we believe that the current rerating of RHBCap’s share price may not last.

We believe investors will be cautious about the outlook for the banking industry in 2015, hence, it could be a challenge for RHBCap’s share price to revert to a 2015 P/BV multiple of 1.1 times, equivalent to an implied share price of RM8.64 prior to the merger announcement.

In fact, we believe that RHBCap’s share price may converge at RM7, our fair value estimate under the proposed merger.

MBSB’s share price has fallen about 22.5% from its high of RM2.66 (at a financial year 2015 P/BV of 1.48 times) and closed at RM2.06 (a 1.09 times calendar year 2015 P/BV) on Tuesday.

Relative to our TP of RM2.75, we keep our “buy” rating unchanged.

We believe that, even on a standalone basis and despite facing regulatory tightening measures in the personal loan financing segment, MBSB will continue to generate attractive net interest income.

In fact, we continue to see potential rerating catalysts for the stock, as the company progresses from a non-bank entity to a bank. — Affin Hwang Investment Bhd, Jan 14

This article first appeared in The Edge Financial Daily, on January 15, 2015.