More M&As ahead in the banking sector?

  • Banking
  • Saturday, 12 Jul 2014

A promising target is AFG - Malaysia's smallest domestic bank with a 3% market share in both loan assets and deposits.

An analyst does not discount the possibility of a Maybank-Public Bank merger.

WITH the financial institution landscape shrinking fast, the number of banks in operation is countable. It will appear that moving forward, medium-sized banks will cease to exist.

As consolidation continues, the country may have only four to five sizeable banks.

The potential acquirers and acquirees include Malayan Banking Bhd (Maybank), Public Bank Bhd, Affin Bank Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd and Affin Holdings Bhd.

Nearly every bank has the capability to buy or merge with a new partner as it has undergone massive fund raising and placements to comply with the Basel III requirements since Jan 2013.

The Basel III guidelines calls for higher capital requirements with capital buffers as well as leverage and liquidity ratios. Most banks have embraced this.

Which are the banks that will appeal to suitors?

Definitely not Public Bank.

This bank with the highest ROEs (return on equity) in the market. It is too pricey for any bank to even consider. At a price-to-book valuation (P/BV) of 3.4 times, it is the most expensive bank in Malaysia.

All other banks are trading at less than two times P/BV. Malaysia’s largest financial institution, Maybank, and the second-largest CIMB, are both trading at P/BV multiples of only 1.9 times.

In May, Public Bank surprised the market when it proposed a RM5bil rights issue, effectively “over capitalising” in terms of its capital requirements for Basel III.

It was speculated that the rights issue was Public Bank founder Tan Sri Teh Hong Piow’s way of building up its war chest to discourage potential suitors from taking up substantial stakes in the company.

Meanwhile, the bank that is likely feeling the most heat from the three way merger would have to be Maybank. Its definitely hungry for more acquisitions.

Recall in 2011, Maybank and CIMB were vying to take over RHB Capital in a deal worth RM20bil.

The two banks had obtained permission from Bank Negara to hold talks with RHB Cap for a potential merger. However, in less than a month, the deal was abandoned.

It is certain now that they will not be looking to make a bid to acquire RHB Cap. “We do not discount the possibility of more mergers and acquisitions, including one between Maybank and Public Bank, hence creating an even bigger entity with a combined asset size of RM890.5bil,” said Affin Research analyst Tan Ei Leen.

Maybank is now on stronger footing as its regional expansion into Singapore and Indonesia has been bearing fruit. It is also targeting its international businesses to contribute some 40% of profit before tax by the end of 2015.

Currently, Maybank has a high dividend yield of 5.2%, and the bank is expected to sustain a pay-out ratio of around 70% to 80% due to its dividend reinvestment plan. It has a market cap of RM91.03bil.

Maybank’s major shareholder is Permodalan Nasional Bhd.

Another promising acquiree target is Alliance Financial Group (AFG), Malaysia’s smallest domestic bank with a 3% market share in both loan assets and deposits. It only has a market capitalisation of RM7.83bil at its P/BV of 1.8 times.

“It is one-tenth the size of the largest three banks by market capitalisation and one-third the size of the next three,” said UBS Research.

AFG has a niche consumer and small and medium enterprise franchise, and a large low-cost deposit base.

Its largest shareholder is Vertical Theme Sdn Bhd, which is a joint venture between Temasek Holdings and Lankah Bahagia Sdn Bhd.

AMMB Holdings Bhd which has a P/BV of 1.65 times and a market cap of RM21.64bil. It made two key acquisitions in 2012, and is already reaping the benefits of these new integrations.

AMMB bought Kurnia Insurans (M) Bhd for RM1.63bil in September 2012, and this propelled it to become the second largest general insurer in the country.

Three months later it bought MBF Cards (M) Sdn Bhd for RM623.4mil. AMMB is trading at a P/BV of 1.7 times.

Affin Holdings Bhd is the cheapest bank, trading only at a P/BV of some 0.83 times with a market cap of RM6.47bil.

In January, Affin acquired Hwang-DBS Investment Bhd for RM1.36bil, and this immediately boosted its stockbroking market share more than four-fold to 15% from 3.3% currently.

Initially, Affin had plans to acquire a stake in Bank Panin Syariah, but this was aborted after news emerged that Dubai Islamic Bank was acquiring 25% of the former.

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Business , Public , AMMB , Maybank


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