THE BUZZ  

The  group  has  announced  a  private  placement  of  300m  new  Maybank  shares  to shareholders representing 3.68% of the group's current issued share capital base. The pricing of the placement shares will only be determined on completion of a book building exercise  which  commenced  last  Friday.  The  group  also  stated  that  depending  on demand, it may increase the quantum of new shares to be placed out. Accordingly, the group also proposed to raise its issued and paid up capital by up to 412m new Maybank shares. The proposed private placement is expected to complete by end-October 2012.

OUR TAKE  

Ahead  of  the  curve.  We  are  a  little  surprised  by  the  group's  proposed  private placement  as  the  high  reinvestment  rate  (averaging  85%)  arising  from  its  current dividend reinvestment plan should sufficiently enable it to scale up its Tier 1 core equity
capital  ratios  to  levels  above  11%  by  2017.  This  should  be  more  than  adequate  to enable  it  to  meet  even  the  most  punitive  core  equity  capital  buffer  ratios  of  9.5%, assuming  that  Bank  Negara  Malaysia  (BNM)  imposed  the  maximum  2.5%  counter cyclical  buffer  exceeding  Basel 3's 7.0% minimum requirement. As such, we view the proposal  as  a  move  to  beef  up  its  core  Tier  1  equity  capital  ratios  ahead  of  the implementation of BNM's counter cyclical buffers from 2014.

Keeping  high  dividend  payout  while  scaling  back  DRP.  Assuming  that  the  group issues  300m  new  shares  and  an  indicative  issue  price  of  RM8.80  per  share  (a  3% discount on the 5-day weighted average share price of Maybank), the  proposed capital raising  exercise  will  raise  RM2.64bn  in  new  capital,  which  will  consequently  raise Maybank Group's Core Tier 1 Equity Ratio from 9.3% to 10.3%. Although  its  ROE  will compress  from  15.8%  to  14.7%,  the  increase  in  book  value  will  partially  mitigate  the effect  of  the  lower  ROE  on  our  fair  value,  which  will  only  come  down  by  2.8%.  More importantly,  the  proposed  private  placement  will  allow  the  group  to  scale  back  its existing  dividend  reinvestment  plan  while  maintaining  a  relatively  high  dividend  payout ratio  of  above  60%.  This  step  will  remove  the  persistent  overhang  on  ROE  growth arising from the existing dividend reinvestment plan.

Vital in sustaining sizzling organic growth.  Given the group's ambition to sustain its already robust Risk Weighted Asset growth rates of 17% p.a (annualised 1HFY12 RWA growth  rates),  coupled  with  Basel  3's stringent capital requirements and deductions (investment in subsidiaries and associates plus goodwill), we believe that the proposed capital  raising  exercise  is  aimed  at  placing  the  group  ahead  of  the  curve  in  meeting those  demands  while  sustaining  its  currently  robust  organic  growth.  Consequently,  we are positive on the exercise as: i) the quantum is relatively manageable and would make only  a marginal  impact  on  EPS  dilution,  ii)  places  the  group  well  ahead  of the curve in achieving  strong  capital  buffers  before  BNM's counter  cyclical  buffers  come  into  force from 2014 onwards, and iii) allows it to sustain growth rates above its peers, which will in turn consistently drive earnings upside surprises and ROE-re-rating.

Future sizeable acquisitions to require more capital. Depending on the scale of its future acquisitions, we believe that such  potential  purchases  will  coincide  with  additional  capital-raising.  As  such,  the  group's  latest  proposed  private placement  is  for  the  stated  purpose  of  working  capital  requirements  and  general  banking  purposes.    Assuming  that  the banking  group goes ahead to bid for General Electric's (GE) 25% stake in Bank of Ayhudya (BAY) and pricing in a 20% premium  from  the  current  market  value,  we  estimate  that  Maybank  group  may  have  to  raise  RM4bn  more  in  new  equity capital to sustain its Core Equity Tier 1 capital above 10.5%, and assuming full deduction of investment in associates as the acquisition of GE's stake in BAY may cost it RM6.4bn while giving rise to a goodwill of RM3.3bn. As such, we believe that  pricing  will  be  a  key  determinant  in Maybank's potential acquisition of GE's 25% interest  in  BAY  as  the  group  has clearly stated that the acquisition should be EPS neutral from day.

Maintain BUY. We are maintaining our BUY recommendation and FV of RM10.30 (2.14x FY12 PBV, 15.8% ROE, 9.5% COE and 4% growth rates) for Maybank given its inexpensive 1.8x FY12PBV (cheapest among the top 3 banks) valuation, with  ROEs  on  track  to  hit  16%.  We  are  positive  on  the  proposed  private  placement  exercise  since:    i)  the  quantum  is relatively manageable and would only be marginally EPS dilutive, ii) places the group way ahead of the curve in achieving strong  capital  buffers  before  BNM  implements  counter  cyclical  buffers  from  2014  onwards,  and  iii)  allows  the  group  to sustain growth rates above its peers, thereby consistently driving earnings upside surprises and ROE-re-rating. 

Source: OSK