Will RHB-AMMB merger materialise?

Vast experience: When he was in Maybank, Khairussaleh has proven to be an astute corporate banker.

While the EPF, ANZ and Azman are keen on a merger, institutional shareholders and costs may be a stumbling block

A MONTH ago, the mood among the top management of AMMB Holdings Bhd, which has seen some major changes, was hawkish.

Some members of the board seemed to be a little reserved in their reaction towards the various changes being instituted by the management, headed by Datuk Sulaiman Mohd Tahir, to rejuvenate the bank.

“It was not a complete change in mood, but the exuberance seemed somewhat lacking,” say executives in the banking industry.

When the proposed merger between AMMB and RHB Bank Bhd was announced in the middle of this week, it came as no surprise to the senior management of AMMB because the bank had previously been speculated as a target in a corporate exercise.

The first deadline to complete the negotiations for both banks is Aug 30, and the banks have signed an exclusivity agreement, meaning that no other bidders can throw in bids until then.

As for the structure, RHB is proposing an all-share deal and the likely route, according to investment bankers, is through the acquisition of the assets and liabilities of AMMB – which is about the only feasible method to take over financial institutions.

Taking charge: Sulaiman has shown his true mettle as a good consumer banking leader.

AMMB is currently trading at a price-to-book (P/B) valuation of 0.98 times, while RHB is at a P/B ratio of 0.97 times. However, the entity that will be the subject of a merger is AMMB’s banking and finance subsidiaries, which may command a different valuation.

“Nonetheless, it would not be too far from the group’s P/B valuation,” says an investment banker.

The announcement of the merger was a stark contrast to what AMMB’s Sulaiman had been advocating in the past 18 months – to grow the sixth-largest lender organically and be in a position of strength to acquire other financial institutions.

“While nobody doubted that Sulaiman was leading the charge for a new-look AMMB, there were some lingering doubts if the major shareholders would succumb to an offer to sell, which is the case,” says the investment banker.

Towards this end, AMMB has reportedly had several suitors in recent years including Malayan Banking Bhd (Maybank) and foreign private equity firm TPG Capital Management. RHB, touted as a candidate to take over AMMB, was back in circulation early this year.

Timing of merger

The proposed merger is happening at a time when the valuations of both banks are at the lower end of the band.

According to an investment banker, since AMMB’s financial performance and profile have improved over the last 18 months, it commands a better valuation compared with two years ago when the bank was mired in the 1Malaysia Development Bhd (1MDB) controversy.

On the first day of reporting for duty at AMMB, Sulaiman was served with two letters. One letter was from Bank Negara sanctioning his appointment as the chief executive, while the other stated that the bank had been fined a sum to the tune of RM53.7mil in relation to not having fulfilled banking regulations. The fine was in connection to transactions done in relation to 1MDB, the government fund that had to be restructured following its inability to meet its debts.

“If the deal was done a year ago, no one would give AMMB a chance. But since then, the bank has improved some of its financial metrics. It has cleared itself of the 1MDB mess and the recent results are showing,” notes a banker.

“Today, AMMB is in a much better position to negotiate a deal compared with a year ago,” says the banker.

Still, there is an opinion that the merger is coming at a period when both banks are trading at valuations lower than one times book and that shareholders should add value and merge when their valuations are high.

However, the banker says that bank valuations have dropped in recent years, and under such circumstances, a P/B value of one times is the norm.

Regardless of valuations, the overriding issue is whether the deal can be done. Can shareholders come to an agreement for an all-share swap structure?

Key issues

Many previous banking have been protracted and fraught with issues of pricing or shareholders’ disapproval.

The key to the deal will be shareholders of both banks, especially those holding the major blocks of shares.

If the transaction is to be done on the asset and liability method, then the threshold is bigger for AMMB, which requires 75% shareholder acceptance.

As for RHB, it only needs a simple majority of 50% plus one share because it is seeking to take over the assets and liabilities of AMMB.

Bank Negara is also a key player, as it would need to give its approval to the deal. However, considering that the central bank has been advocating for banks to be institutionalised, approvals are not likely to be a problem.

A common shareholder in both banks is the Employees Provident Fund (EPF), which has a 40.8% stake in RHB and a 9.9% stake in AMMB based on latest filings with Bursa Malaysia.

The other major shareholders in RHB are Aabar Investments PJS with a 17.75% stake and OSK Holdings Bhd with 10.13%.

AMMB’s major owner is Australia and New Zealand Banking Group Ltd (ANZ) of Australia with a 23.78% stake, while its second-largest shareholder is founder Tan Sri Azman Hashim, who has an effective stake of 12.97%.

Unlike the failed three-way merger involving CIMB Group Holdings Bhd, RHB and Malaysia Building Society Bhd (MBSB) in 2015, this deal, according to some, stands a better chance.

The EPF can vote

For starters, the EPF, unlike in the case of the three-way merger, will be able to vote at AMMB and RHB EGMs.

Recall that Bursa had barred the provident fund from voting in the proposed mega-merger, given that it had controlling stakes in both RHB and MBSB and there could be potential conflicts of interest.

“The provident fund has a controlling block in RHB and less than 10% in AMMB. So, it can vote in both the shareholders’ meetings,” says an investment banker.

“With the EPF already owning 40% in RHB, it is likely that it can push the deal through,” he says. “In the case of AMMB, it has less than 10% and is also able to vote because it is only an investor in the bank.”

Elsewhere, Aabar’s stake in RHB would continue to whittle down if the merger happens.

Aabar’s purchase price of RHB (then RHB Capital Bhd) was RM10.80 for a 25% stake and it had attempted to get a buyer for its stake. However, it has not been successful.

Also, Aabar has been on its own reducing its interest in RHB. It did not participate in the option to convert the dividends it received into shares. Aabar also did not participate in RHB’s rights issue in December 2015, which diluted its stake to the current 17.8%.

Then, there is Tan Sri Ong Leong Huat’s OSK Holdings, which has a 10.13% stake in RHB. The stake will be diluted in the proposed exercise.

“With banking regulations becoming increasingly punitive, individuals such as Ong may be reluctant to plough more money into banking,” says an analyst.

AMMB’s key hurdle

At AMMB, ANZ and Azman – collectively owning 36.77% – hold the trump card. Together with the EPF’s stake of almost 10%, they collectively own almost 47% of the bank.

Institutional shareholders hold the bulk of the rest of the shares.

“The institutional shareholders are the ones who will call the shots in the deal,” says an investment banker.

ANZ has made it known that it is looking to dispose of its stake in AMMB, while Azman is said to be “impartial to the move”.

Last year, ANZ wrote down the value of its investment in AMMB in its books and the cost is said to be about RM5.31 per share currently, which is about the same as the bank’s March book value of an equity per share of RM5.32.

“After the merger, ANZ’s stake will be reduced to about 10% and it will be easier to dispose of its block of shares to insurance companies and even government funds such as Ekuiti Nasional Bhd or Ekuinas,” says a retired banker.

The former banker says that the timing is right for the merger because AMMB’s value will go up given another year or two. “The bank has hired a lot of new talents and they all have targets to meet. So, the results will show and valuations will be higher,” says the former banker.

Business uplift

According to UOB Kay Hian, on paper and assuming zero revenue attrition, the merged entity will be the fourth-largest banking group in Malaysia, behind Maybank, CIMB Group Holdings Bhd and Public Bank Bhd – based on their asset size as at the end of last year. It will also be a leader in asset management, general insurance, brokerage and second in terms of Islamic banking.

Cost and duplication

However, the downside to the deal is that the consolidation exercise will be costly because of the duplication and reduction in staff.

The merged entity will have a combined staff strength of roughly 25,000 people and a network of 383 branches. Hence, its combined cost-to-income ratio, an indicator of the bank’s cost control efficiency, will be high.

UOB Kay Hian’s back-of-the-envelope calculation on revenue attrition downside and cost synergies upside estimates that the merged entity will be required to shed 18% of its combined headcount and 20% of other operating cost for it to realise a positive uplift in the return on equity from the current 8.3% to 10.0%.

As the potential scale of such an exercise could involve an estimated 4,000 employees and closure of 80 to 100 branches, it will require a fair degree of gestation, notes the research firm in its report.

“The key would be to bring down the cost-to-income ratio and manage the cost of the merger. It would need strong managers to handle the job and they have to work together,” says a banker.

On this score, the merged entity will have enough talent to drive the changes. RHB is led by Datuk Khairussaleh Ramli – a banker with more than 20 years’ experience, including regional experience. When he was in Maybank, Khairussaleh proved to be an astute corporate banker.

As for AMMB, it has Sulaiman, who has shown his true mettle as a good consumer banking leader. Together, the two could make the merged entity a strong outfit for its potential single-largest shareholder – the EPF.

Shares in RHB were down 20 sen to RM5.19, while AMMB shed 12 sen to RM5.09.