RHB Bank and AMMB said the transaction will effectively be an all shares merger.
KUALA LUMPUR: RHB Bank and AMMB saw their share prices retreat from the early high on Friday after the mixed outlooks from analysts about the proposed merger of the two banking groups.
At 12.30pm, the FBM KLCI was up 9.65 points or 0.55% to 1,772.76. Turnover was 1.15 billion shares valued at RM968.82mil. There were 555 gainers, 257 losers and 342 stocks unchanged.
RHB Bank fell 13 sen to RM5.26 and AmBank was six sen lower at RM5.15.
RHB and AMMB had obtained Bank Negara Malaysia’s (BNM) approval to commence discussions for a potential merger, and both parties have entered into an exclusivity agreement to negotiate.
Maybank Investment Bank Research said it was neutral to slightly positive on the potential merger.
It said on Friday the merger valuations are decent and the impact on financials is expected to be marginal.
“The success of this merger will nevertheless very much depend on driving revenue/cost synergies as quickly as possible.
“One risk is of a potential share overhang post-merger, which could be mitigated if a strategic shareholder can be identified,” it said.
As for UOB Kay Hian Malaysia Research, it said as discussions were in the preliminary stage, details were scant.
“We do not discount the longer term upside from a cost synergies perspective. However, this will require a certain gestation period with the market likely to focus on the immediate term earnings dilution.
“We maintain our Sell call on RHB Bank (Target: RM4.65) and Hold for AMMB (Target: RM4.90) given the lower share price downside to our target price,” it said.
UOB Kay Hian Research said conducting a back-of-the-envelope calculation on revenue attrition downside and cost synergies upside, it estimated that the merged entity will be required to shed approximately 18% of its combined staff headcount of roughly 25,000 staff and 20% of other operating cost (eg: branches, IT and marketing).
This was necessary for it to realise a positive uplift in return on equity from the current 8.3% to 10.0%. Key to its assumption was a potential revenue attrition of 15% which it believes is realistic given the inherent duplications within the merged entity’s corporate and investment banking division.
“As the potential scale of such an exercise could involve an estimated 4,000 staff and closure of 80-100 branches, it will require a fair degree of gestation.
“A key point to note is whether EPF, the largest shareholder of RHBBank with a 40% stake, is able to seek a waiver from regulators to allow them to vote in this deal.
“Under the current ruling, they will not be allowed to vote as they own stakes in both RHBBank and AMMB which raises the issue of conflict of interest.
“Assuming EPF is not able to vote and that Aabar Investments may vote against the deal, it is crucial that the deal gets the support of OSK Holdings Bhd
and PNB which on a combined basis would have an effective 39.6% stake in RHBBank - excluding EPF from the shareholders voting base.
"In such a scenario, the deal would require only 30% of the remaining minority shareholder to vote in favour to achieve a simple majority,” it said.
As for AllianceDBS Research, it reinstated its ratings and target prices for AMMB and RHB Bank
“We are keeping our Hold recommendation on RHB with a TP of RM4.90 (0.9 times FY17 book value). We are downgrading AMMB to Hold (from BUY), but with a higher TP of RM5.40 (one times CY18 BV).
It said it seems that the transaction could be priced at one times book value, which will minimise any goodwill issues that may arise from the deal.
“With no further details on the proposed merger, there is little we can conclude on the extent of revenues and cost synergies to be expected.
“Based on the little that we know, with the all-share deal, we expect the enlarged RHB’s EPS to see a slight 3.5% dilution, return on equity to inch down by 0.3%.
“The all-share transaction will see current major shareholders’ stakes being diluted. The key risk to this transaction will revolve around whether the respective shareholders will agree to this proposal; this will be decided upon at the respective EGMs.
“We can at best view this proposed merger as neutral. Apart from size, it would appear that the merged entity would need to extract a lot of cost synergies. To start with, its branch network, staff and possible overlap in businesses would need to be assessed.
“We are reinstating our ratings and TPs for AMMB and RHB. We are keeping our Hold recommendation on RHB with a TP of RM4.90 (0.9 times FY17 book value).
"We are downgrading AMMB to Hold (from Buy), but with a higher TP of RM5.40 (one time CY18 book value)," said AllianceDBS Research.
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