Although there is no formal announcement, we sought clarification with Maybank's management on recent press reports of the group being interested in acquiring General Electric's 33% stake in Bank of Ayudhya (BAY TB), as well as its broader strategy of eventually having a full-fledged commercial banking platform in Thailand. This report sets out our key takeaways from that discussion.

Early stages of identifying the right fit. The group has been studying numerous banking M&A opportunities in Thailand, but identifying the right fit at the right pricing remains a challenge at this point of time.

Buy big or enter small and grow organically? The group is still contemplating the exact mode of market entry into Thailand's commercial banking space. Of the two main options it is assessing, the first is to pay a large premium and incur huge upfront capital outlay for a decent sized mid-scale bank like BAY, but with the shareholding limited to under 50%, which could be an issue considering the stringent Basel III capital requirements, and even more stringent Financial Holding capital requirements. The second option is to buy a smaller scale bank with turnaround potential, which may involve a smaller initial capital outlay and hence lower risk and EPS dilution, but which provides room for the group to seek exemptions in order to own a sizeable controlling stake of more than 50%. The group would then gradually leverage on its already strong lead in retail broking to build up organic scale over time.

Lower risk and organic growth may be the preference. Given the fact that the group already has a market-leading retail broking platform in Thailand, we believe that it is likely that it may choose Option 2, which is to buy a smaller bank with a relatively solid niche corporate and wholesale banking platform and build up its retail banking platform organically given the synergies extracted from its retail brokerage database in Kim Eng Thailand. The downside is that it may take time for Maybank to establish a scalable local retail deposit-taking franchise from a low base, and this constraint may result in lackluster growth contribution to group earnings even in the medium term.

Entry into Thai commercial banking a matter of time. Looking at the group's key regional Asean platforms in Singapore, Indonesia and the Philippines, Thailand is the only market in which the group does not have a commercial banking platform to complement its brokerage business. In view of this as well as its leading brokerage market share in Thailand and the growth potential stemming from that country's sizeable population, we believe that it would be matter of time before the group eventually makes its presence felt in Thailand's commercial banking space.

Pricing and EPS dilution could be key stumbling blocks. Based on our back-of-envelope calculations as indicated in the table below, a 33% stake in BAY at its current market cap will cost Maybank RM7bn and potentially dilute its EPS by 4.4%. This is something management will take into consideration, especially if the pricing for GE's stake is over and above current market values thus leading to a potentially high level of dilution, which management may not be too comfortable with.

Maintain BUY. We are maintaining our BUY recommendation on Maybank with an FV of RM10.30 (2.12x FY12 P/BV, 15.8% ROE). We particularly like Maybank given its inexpensive valuations of 1.8x FY12PBV, which is the cheapest among the top three Malaysian banks. Its ROEs is also on track to hit 16%, similar to CIMB's ROE profile but with valuations at a 20% discount to CIMB. In addition, it has attractive dividend yields in excess of 7%, the highest among banking stocks in Malaysia.

Source: OSK