News

• RHB Bank Berhad (RHB) and AMMB Holdings Berhad (AMMB) announced today that both parties have mutually agreed to end discussions on the proposed merger of the two banking groups. After much discussion and deliberation, RHB Bank and AmBank Group were not able to reach an agreement on mutually acceptable terms and conditions for the proposed merger.

Comment

• Deal is off. RHB and AMMB have announced that they have ceased discussion on the proposed merger to create 4th largest bank in Malaysia. The decision was arrived as both parties were not able to reach an agreement on mutually acceptable terms and conditions for the proposed merger.
• What blocking the deal? As we had highlighted before, both parties were possibly facing challenges to extract synergies from the potential merger. In addition, we see another stumbling block being the huge overlaps for both banks serving similar markets.
• Impact to RHB. Slightly positive as the termination of merger will eliminate the fear of ROE dilution from the deal. We expect RHB to resume its effort in IGNITE 2017. Additonally, we also expect RHB to focus on expanding SME segment and continue to eye deals in the corporate loan segment as both are gaining strong momentum.

• Impact to AMMB. On business front, we see AMMB continue riding on business recovery capitalized on its Top 4 aspirations introduced last year. Additionally, we may see more NIM recovery in FY18 as AMMB shields itself from higher fixed deposits and active funding cost management.

• What next? We foresee banking sector M&A to take a breather for a while. That said, the focus of next round of M&A is on MBSB and Asian Finance Bank, after MBSB having obtaining the clearance from Finance Ministry to acquire AFB on 20-Aug.

Risks

• Deteriorating asset quality that will impact banks provisioning level and high household debt that will limit consumers’ ability to further gear up.

Rating

• RHB. Maintain our TP at RM5.50. TP is derived from GGM model i) WACC of 9.9% ii) ROE of 9.2%. Maintain HOLD .

• AMMB. Maintain our TP to RM5.20 . TP was based on GGM i) ROE of 8.8x ii) WACC of 8.9%. Maintain HOLD.

Top Picks

• Maybank (BUY, TP: RM9.90) and BIMB (BUY; TP: RM4.86).

Source: Hong Leong Investment Bank Research - 23 Aug 2017