We expect investors’ reaction to be relatively neutral subsequent to the announcement by both RHB and AMMB to commence a merger discussion, with RHB proposing to acquire the assets and liabilities of AMMB at a 1x book value. In our view, pricing of the deal is fair as dilution impact is rather minimal while over the longer term, management’s ability to reap the cost synergies would be the largest re-rating factor. Maintain HOLD on RHB, with PT at RM5.39. We also maintain our HOLD rating on AMMB, PT at RM5.20 (0.9x CY18 P/BV).

Both RHB Bank and AMMB to Commence Merger Discussion

RHB Bank and AMMB had both announced on 1 June 2017 that they had obtained approval from Bank Negara Malaysia to commence discussion for a proposed merger and both had entered into an exclusivity agreement (with automatic extension upon submission of a proposal to BNM). At a conference call held by RHB, its management mentioned that RHB will be proposing an all-share deal in order to acquire the assets and liabilities of AMMB, at a potential pricing based on AMMB’s book value of 1x.

Investors’ Potential Reaction Could be Neutral

In our view, as the pricing of the merger is potentially at a 1x book value, we do not think that there’ll be significant reaction to both RHB and AMMB’s share prices, given that the expected dilution impact on EPS and ROE will be minimal (detail in Fig 9). In previous M&A experience and track records, the move to realize cost synergies is the most challenging tasks and this remains our key concern over the longer-term. Another stumbling block to the merger could be shareholders’ approval as we believe that it would be more challenging on AMMB’s side (requiring a 75% approval threshold).

Maintain HOLD on RHB; PT at RM5.35 (based on 0.87x 2018E P/BV)

We Maintain Our HOLD Rating on RHB, With Our Gordon Growth-derived price target at RM5.35, based on 2018E’s 0.87x P/BV multiple. Our assumptions are based on CY2018E’s ROE of 8.5%, while cost of equity of 9% is unchanged. Our FY17-19E assumptions are NIM to improve to 2.12- 14% (arising from better loan pricing and improved funding-mix), loan growth at 5.6-6.0% and credit cost at 35-44bps.

Source: Affin Hwang Research - 2 Jun 2017