• Any cash deal for RHB unlikely, capital ratios just adequate.
• May  see  a  relief  rally  if  the  merger  is  off,  but  overriding determinant would be the group’s financial performance.
• HOLD  CIMB; still  prefer RHB (BUY; TP: MYR8.90) which is also decently priced if merger does not go through.

What’s New

The Edge Weekly  reports  of a high chance that the CIMB-RHB-MBSB merger  may  be  called  off  on  grounds  that  (i)  RHB  shareholders want a cash cum  shares deal as opposed to  an  all shares  deal,  (ii) the  economic  situation  and  operating  environment  have  become much more difficult thus cost synergies would be harder to realize.

What’s Our View

With  a  CET1  ratio  that  is  just  adequate  at  9.5%,  we  do  not  see  a cash cum shares  deal as palatable to CIMB.  CIMB’s  and RHB’s share prices  are 30% AND 21% off their 52 week highs, and  CIMB’s foreign shareholding has declined to just  32.7% end-Dec 2014 closing in to its  post-GFC  trough  of  31.6%.  We  may  thus  see  a  bounce  in  share prices if the deal is off.

We do think however, that the selldown on CIMB has been mainly a function  of  its  poor  results  and  Indonesian  concerns,  rather  than the merger. Amid weak capital markets and ongoing concerns over CIMB  Niaga,  we  expect  CIMB’s  earnings  to  be  subdued  this  year . The  group’s  4Q14  results  (due  out  before  12  Feb),  could  fall  short of  consensus  expectations  due  to  higher  provisions.  Our  FY14  and FY15 net profit forecasts are 8% and 10% lower than consensus.

We  still  prefer  RHB  (BUY)  for  even  if  the  deal  is  called  off,  RHB offers  better  earnings  visibility ,  cheaper  valuations  -  FY15  PER  of 9.6x (CIMB: 10.7x), P/BV of 1x (CIMB: 1.1x) for similar 10.8% ROE.

The impact of a call-off  of the deal  on  MBSB  (MBS MK, Not  Rated) would  likely  be  slightly  negative  with  downside  bias  to  its  premerger  price  of  around  MYR2.20.  Current  valuations,  at  MYR2.46, are not demanding (end-Dec 2014 P/BV of 1.7x; 18% ROE).

Source: Maybank Research - 12 Jan 2015