AMMB-RHB 20110404 MIB

Acquisition / Disposal 4 April 2011 Maybank IB Research PP16832/04/2011 (029339) Merge AMMB & RHB Cap? Why not…. Could it, should it, would it? Could the merger take place? We think it is plausible, for it would tie in with aspirations for further consolidation in the industry and the creation of larger banks. Should AMMB and RHB Capital merge? We believe such an exercise could be earnings accretive and synergistic. Would it happen? That’s the billion Ringgit question … that we will have to leave open-ended. We maintain a Buy on RHB Capital with a marginally higher TP of RM9.50 (from RM9.40) and a Hold on AMMB (TP: RM6.80) for now. Our scenario. Our scenario assumes a two-step process whereby ANZ acquires ADCB’s entire 25% stake in RHB Capital, which is then followed by AMMB’s acquisition of RHB Capital’s assets and liabilities via a share exchange. Our revised TP for RHB Capital implies a forward P/BV of about 1.8x, which is what we have assumed to be a fair price for the acquisition by AMMB. This would price ADCB’s 25% stake in RHB Capital at RM5.1b. For the share exchange, we have assumed a P/BV of 1.8x for both banks. Implications to shareholdings. In the above scenario, ANZ’s shareholding in the enlarged group would expand marginally to 24.4% from 23.8% but the entity would then be double in asset size. More importantly, we would expect ANZ to still play an active role in running the operations of the enlarged group. The EPF’s stake in AMMB would effectively more than double to 28.6% from 13.2% presently, by virtue of its present 44.6% stake in RHB Capital. Tan Sri Azman Hashim’s stake in the enlarged AMMB would dilute to 8.5% from 16.8%. Earnings accretive, though initially dilutive on ROEs. We estimate an 8.4% enhancement to group EPS on consolidation. We expect an initial dilution in AMMB’s FY13 ROAE from 13.3% to 10.2%, but with room for potential cost savings – every 10% reduction in overheads would result in a 1%-pt improvement to ROEs. Meanwhile, P/BV would decline correspondingly to reflect the lower ROEs. At our assumed share exchange price of RM6.97 (P/BV of 1.8x for AMMB pre-merger), the enlarged AMMB would trade at a prospective P/BV of 1.2x which we think is fair for now, to compensate for the lower ROAE of 10.2%. Areas of synergy; re-rating subsequently? Size aside, a merger would balance off the clientele mix of both banks and result in a more well-distributed loan portfolio. AMMB brings to the table its strength in insurance while RHB Capital offers its larger treasury operations and contributions from overseas operations. As the enlarged AMMB reaps synergies from the exercise, we believe there is every room for the stock to re-rate up. Being the third biggest in asset size post merger, and as the enlarged AMMB works towards a mid-teens ROAE over the next few years, valuations could close against that of the country’s two largest banking groups as returns improve. RHB Capital Buy (unchanged) Share price: RM8.72 Target price: RM9.50 (from RM9.40) AMMB Holdings Hold (unchanged) Share price: RM6.57 Target price: RM6.80 (unchanged) Wong Chew Hann, CA [email protected] (603) 2297 8686 Description: Banking. Information: Ticker: RHBC MK Shares Issued (m): 2,153.5 Market Cap (RM m): 18,778.3 3-mth Avg Daily Volume (m): 3.51 KLCI: 1,555.38 Major Shareholders: % EPF 44.6 Abu Dhabi Commercial Bank 25.0 Price Performance: 52-week High/Low RM8.76/RM5.55 1-mth 3-mth 1-mth 3-mth 1-mth 10.5 9.8 10.5 9.8 10.5 Price Chart (RM8.72) 7.5 8.0 8.5 9.0 No v- 10 De c- 10 J an-11 Fe b-11 M ar-11 RHBC MK Equity

AMMB-RHB 20110404 MIB

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