News

The Star on Saturday reported that a financial institution from China is eyeing a stake in AMMB Holdings. The stake will be in the form of ANZ shares, which currently is below 23.8% and the suitor is believed to Bank of China (M) Bhd (BOC).

Comments

For BOC, the deal is strategic as it can raise its presence in the local market from just being a foreign commercial bank.

The entry of a strategic foreign partner will provide AMMB ‘muscle’ to add additional capital to beef up its CET1 and CAR ratios but its current CET1 and CAR of 10.73% and 16.05% respectively, surpass regulatory requirements.

Pricing will be an issue with the current challenging environment. Recall that ANZ bought its AMMB stake at RM3.63/share which translated into a P/B ratio of 1.96x. AMMB is currently trading at 0.9x P/B, which is ripe for the acquirer but not so for shareholders.

AMMB has been trading at RM6.56/share or 1.4x in the last 5 years. The current industry average is 1.5X. Past acquisitions were done in the range of 1.7x-1.9x.

If the deal is inked at 1.5x P/B then the acquisition price should be at RM6.96/share.

Outlook

We don’t see ANZ as desperate to sell at current market value. The challenges facing by AMMB is an industry-wide phenomenon that affects the whole banking industry, resulting from the current economic environment and not specific to only AMMB.

Pricing issue will certainly be a sore point. Despite the challenges facing the banking industry, we don’t expect ANZ to exit at such cheap valuations. The valuation will depend how both sides see the industry going forward. Thus, we expect a prolonged negotiation.

Forecast

No changes were made to our forecasts.

Rating

Maintain MARKET PERFORM

Valuation

NO change in our valuations with TP at RM5.88. This is based on 1.11x CY16 P/B (previously 1.21x CY15 P/B); we utilised: (i) COE of 9.2% (unchanged), (ii) CY16 ROE of 10.3% (previously: 10.7%), and (iii) terminal growth rate of 2% (unchanged).

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected loans and deposits growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Source: Kenanga Research - 7 Sep 2015