- We maintain our HOLD rating on Malayan Banking Bhd (Maybank) with an unchanged fair value of RM9.80/share. This is based on an unchanged ROE of 13.4% for FY14F, and an unchanged fair P/BV of 1.7x.

- We have earlier highlighted in our recent report that there may be changes to the banking level common equity tier 1 (CET1) ratio, if Maybank is required to locally-incorporate its operations in Singapore.

- If the Singapore operations have to be incorporated, the company affirmed that it would consider it as an investment in subsidiary.

- This may lead to some impact on the banking entity’s CET1 ratio.

- Our sensitivity analysis shows that the banking level CET1 ratio will be at 7.92% by 2018, assuming it incorporates its operations in Singapore.

- Assuming a comfortable banking CET1 ratio of 10%, Maybank may possibly need to raise RM7.6bil in fresh capital.

- If the need arises, we believe that Maybank is likely to consider another new share placement, rather than a rights issue. This is because the company believes that its last rights issue in 2009 had led to a large decline in market capitalisation then.

- Notwithstanding the more dilutive impact of a rights issue (which is normally priced at a larger discount vs. an issuance of new shares), we prefer the rights issue as it would allow all shareholders to have a fair participation in the exercise.

- Our sensitivity analysis shows that a rights issue on a 1-right-for-every-9-shares basis may be possible, at a potential rights price of RM7.60 (about 20% discount to current market price) to raise new capital of RM7.6bil.

- Our sensitivity analysis also indicates that the rights issue will dilute ROE to 12.6% from our current forecast of 13.4% FY14F. We estimate book value to be slightly enhanced to RM5.79/share, from our current RM5.69/share for FY14F. With a lower ROE, our potential fair P/BV is reduced to 1.6x from 1.7x currently for FY14F, based on the Gordon Growth Model. This leads to a possible new fair value of RM9.10/share, compared to our current RM9.90/share.

- Maintain HOLD.

Source: AmeSecurities