The banking sector not only lacks re-rating catalysts in the near-term but is also pressured by: (i) tapering loan growth, (ii) rising competition leading to NIM compression, and (iii) potential bottoming of NPL cycle. Furthermore, valuations of Malaysian banks are relatively rich. Hence, we remain NEUTRAL on the banking space while advocating a selective stock picking strategy. Our top picks are MBSB (TP: RM2.65) and RHBCAP (TP: RM10.00) premised on M&A play while our other OUTPERFORM recommendations are MAYBANK (TP: RM11.20) and AEONCR (TP: RM17.80). The remaining banks under our coverage are MARKET PERFORM (please refer to our peer comparison table on page 20 for details).

Budget 2015 expectations – Neutral with slight positives for non-bank money lenders. It is unlikely that Budget 2015 will directly impact on banks and non-bank money lenders, especially since the Overnight Policy Rate (OPR) has only just been raised. Furthermore, the various measures currently in place to spur consolidation within the industry have proven sufficient and are still effective. The potential merger underway now between CIMB, RHBCAP and MBSB is testament to this and will be the largest to date. Having said this, banks could still be indirectly impacted through measures imposed on the property sector. However, our property analyst opines that any impact from potential measures to be introduced, this time around, should have little to no effect on property prices or volume. Hence, Budget 2015 is expected to have a neutral impact on banks. Non-bank money lenders, on the other hand, could see shortterm spikes in their receivables or loans in the event that more “free money”, such as “Bantuan Rakyat 1 Malaysia” (BR1M), is handed out. The likelihood of handouts is higher if unpopular measures were to be introduced, and we believe that some could be headed our way. The impending Goods and Services Tax (GST) will also ‘encourage’ spending ahead of its implementation on 1 Apr 2015. In this respect, impact on non-bank money lenders should lean towards neutral-positive.

Potential CIMB-RHBCAP-MBSB merger – Our thoughts and what you should do. Zooming in on the current potential merger and acquisition (M&A) at hand, and in view of the fact that the closed-door discussion period between CIMBRHBCAP-MBSB is drawing to an end on 8 October (with an option to extend upon application), we took the initiative to study four different probable forms of M&A structures. They are (1) injection of the three banks into a special purpose vehicle, (2) CIMB to acquire RHBCAP and MBSB, (3) RHBCAP to acquire CIMB and MBSB and (4) MBSB to acquire CIMB Islamic and RHB Islamic. Based on our findings, Structures 1, 2 and 3 seems plausible while Structure 4 is unlikely. In any case, should the merger materialize, we have a positive medium-to-longer term outlook on the enlarged group. We think CIMB’s stellar M&A track record in the past could help overcome challenges in harmonizing operations of the three banks. Besides, the trio will also be able to tap on a larger balance sheet to solicit for more businesses. However, the group’s financial performance may suffer in the short-term. We opine that the effect from higher operating expenses could be felt almost immediately post merger while synergistic opportunities can only be reaped later. All things considered, target companies will benefit the most given the common practice of placing premiums on acquisition targets to induce shareholders to give up their shares.

4Q14 strategy and top picks – capitalise on probable M&As. In view of the above and based on our anticipation that (i)Budget 2015 is likely to be a non event to the banking (and non-bank money lending) sector and (ii) our belief that the possibility of the CIMB-RHBCAP-MBSB merger going through is quite high, we advocate investors to buy on weakness to capitalise on such probable M&A as this could be a long awaited rerating catalyst. In line with this, our top picks for 4Q14 are MBSB (OP, TP: RM2.65) and/or RHBCAP (OP, TP: RM10.00).

Maintain NEUTRAL on the sector. All-in-all, we maintain NEUTRAL on the banking sector with MBSB (TP: RM2.65), RHBCAP (TP: RM10.00), MAYBANK (TP: RM11.20) and AEONCR (TP: RM17.80) kept at OUTPERFORM and the rest of the stocks under our coverage at MARKET PERFORM.

Source: Kenanga