- We maintain our HOLD rating on CIMB Group Holdings Bhd (CIMB) with an unchanged fair value of RM7.30/share for FY14F. This is based on an FY14F ROE of 12.7% and an unchanged fair P/BV of 1.7x.

- CIMB, RHB Cap and MBSB have announced that all three companies’ shares will be suspended today.

- We believe this is likely to be related to a merger between all three entities. CIMB’s involvement in a possible merger with RHB Cap and MBSB is a total surprise to us.

- We believe the merit for the deal is likely to be a major shift in CIMB’s position in the domestic market.

- CIMB will emerge as the largest banking group in the country, with a potential asset size of RM614bil, way surpassing Maybank’s current asset size of RM578bil. Currently CIMB is ranked second in terms of asset size at RM380bil.

- Other than this, we foresee CIMB gaining exposure into RHB Cap’s niche EASY segment’s unit trust (ASB) and personal loan financing segments, as well as MBSB’s personal loan to the civil servants’ sector.

- While there are no further indications on the structure of the merger, we have assumed that CIMB would be taking over RHB Cap and MBSB separately, through issuances of new CIMB shares (see our sensitivity analysis in the following pages).

- Based on our sensitivity analysis, we estimate that CIMB’s ROE may be potentially diluted to 10.7% from 12.7% for FY14F. Our potential new fair value may be RM6.87/share.

- Assuming the takeovers are done with new CIMB share issuances, we estimate that EPF will end up with a significant 25.0% stake in CIMB, from its current 14.5% holdings.

- Khazanah is also expected to retain a significant stake, with an estimated holding of 20.0% post the merger, from 29.6% currently.

- Thus, with the merger, CIMB may potentially end up with two major strong institutional shareholders.

- Apart from this, we foresee some duplication in both CIMB and RHB Cap’s commercial banking and investment banking activities.

- Maintain HOLD on CIMB.

Source: AmeSecurities