It’s widely reported and speculated that ANZ is looking to sell its 24% stake in AMBANK, as it is looking to focus more on its own domestic market rather than its overseas assets due to their weak earnings. Since last year, there were speculative reports on several interested parties willing to buy ANZ’s stake in AMBANK ranging from Chinese, Taiwanese institutions and recently a US-based equity fund. With recent developments brewing, we believe ANZ might be willing to let its stake go based on the premium on its purchase value.

ANZ disposing its stake? It’s extensively reported that the Melbournebased Australian New Zealand Banking Group (ANZ) is open to dispose off its entire 23.8% stake in AMBANK following pressure from shareholders back home to improve returns from its Asian assets. However, so far, there has been little or no interest from local banks to take up the entire block, with pricing said to be a key stumbling block. Recall that ANZ had bought into AMBANK in 2006/2007 at an average price of RM3.63 per share or RM2.58b in total. However, the carrying value/cost (after impairments) was report at AUD1.16b (or RM3.52b) as of end-Mar16, implying RM4.90/piece. For banks, holding minority stakes in another lender is proving to be expensive under new rules that require them to set aside equity capital against such investments. These rules were less cumbersome when ANZ acquired its AMBANK stakes before the global financial crisis of 2008/2009. AMBANK’s relatively small earnings contribution of around 2% to ANZ’s group earnings base (FY13/FY14/FY15) and Basel 3 punitive capital requirements and deductions on minority shareholdings are said to be further factors underpinning ANZ’s potential stake disposal in the bank. Furthermore, it was also reported that ANZ CEO - Shayne Elliott - is turning his focus back on the bank's core home market, reversing past efforts to build a pan-Asian footprint.

Low P/BV…an unattractive proposition to dispose? ANZ bought its AMBANK stake at 1.96X P/BV or an average of RM3.63/share in two tranches in 2006/2007 (or AUD1.29 per share at 2006/2007 exchange rate). Naturally, it would like to sell its stake at the same P/BV it acquired. However, in the present situation AMMB is currently trading at a low 0.9x P/BV (while the industry average is trading at 1.5x P/BV) a steep discount to ANZ’s purchase of 1.96x P/BV. Of course, to be fair, the ROE of AMBANK then was registered at 8.0/11.2%, a higher set of numbers as opposed to the projected 8.0/8.4% for FY16E/FY17E. Hence, P/BV valuation should be lower.

Will this disposal a rerating catalyst? As there is less likely of a Mandatory General Offer (MGO) because it will require the new shareholder to hold more than 33% of AMBANK and Bank Negara has put a cap of 30% limit on strategic foreign shareholdings for commercial banks. As such, we may only see strong rerating if and when the disposal price attract a much higher valuation premium over current valuation.

For now, we maintain MARKET PERFORM with an unchanged TP of RM5.57. As no impact on earnings if/and when ANZ sell its stake in AMMB, we maintain our call with an unchanged TP of RM5.57. This is based on 1.06x FY17 P/B where we utilised: (i) COE of 9.2%; (ii) FY17 ROE of 9.6, and (iii) terminal growth rate of 2.5%.

Source: Kenanga Research - 11 May 2016