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[UPDATE] Opportunity Or Danger? Malaysia’s Largest Bank In The Making
Hot Picks, Tradeable | 09 October 2014
By: Tradeable
Articles (256)

[UPDATE on Friday, 10 October 2014, at 9am: Adding details of the merger deal, resumption of trading.]

CIMB Group (CIMB), RHB Capital (RHB), and Malaysia Building Society (MBSB) are poised to announce details of a possible three-way merger deal. The deal, if successful, could ultimately create Malaysia’s largest banking group and South-east Asia’s fourth largest lender by assets. All three stocks will resume trading today, Friday, 10 October 2014 after a full day suspension the day before.

Here’s What We Know:

  • According to The Star, the deal will involve a share swap between RHB and CIMB. MBSB’s portion of the deal will involve cash and shares. According to these unnamed sources, the deal will still require the approval of Malaysia’s central bank.
  • The share swap deal between CIMB and RHB at an exchange ratio of 1.38 (1 RHB share for 1.38 CIMB shares) will value CIMB’s shares at RM7.27 apiece (a 0.4 percent premium over the previous closing price) and RHB’s shares at RM10.03 per share (a 15.7 percent premium over the previous closing price).
  • As part of the transaction, CIMB’s and RHB’s is Islamic banking arms will merge with MBSB in a deal valuing MBSB at RM2.82 (a 16.5 percent premium over the last closing price). The deal will create a mega Islamic bank which will be a subsidiary of the enlarged CIMB-RHB banking group.
  • The structure of the deal between RHB and CIMB is meant to overcome substantial resistance from RHB’s second-largest shareholder, Aabar Investments. Aabar Investments had previously bought its stake in the bank in 2011 when RHB was the target of a takeover battle between MayBank and CIMB. Even though priced at a premium, the valuation of RHB’s shares is still below Aabar’s valuation of RM12 per share.
  • If successful, the new banking entity will have total assets of US$194 billion, and a 23 percent market share of domestic loans. Malaysia’s current top bank, Maybank has total assets of about US$173 billion as of 31 March 2014 and a 19 percent market share of domestic loans.

Tradeable’s POV

  • This deal could potentially reshape Malaysia’s banking sector and the broader South-east Asian banking landscape. The deal would also result in the creation of a mega Islamic bank. As James Lau, investment director at Pheim Asset Management Asia in Kualau Lumpur mentioned to Bloomberg, “Other banks are watching the outcome and how it might impact on their market positioning.”
  • At the opening bell, we can see that traders have already started to stir the cauldron. In particular, MBSB is witnessing crazy volumes as it shoots up to the top volume charts with over 9.2 million shares exchanging hands in the first 10 minutes of trading! It would seem that the movement of all three banks are somewhat following the analysts’ ratings of the three stocks. In terms of bullishness, analysts favour MBSB over RHB over CIMB.
  • Analysts are generally more bullish on MBSB. But could it be because only 3 analysts are covering it?

    RHB looks to have been on an upward trend since the beginning of the year, nearly hitting the average target price set by 15 analysts

    Probably the most bearish of the 3, CIMB's recent financial performance does not seem to have garnered much confidence.

  • At the time of writing, we note that MBSB is up about 8.4 percent (+RM0.20), RHB is also up by about 2.3 percent (+RM0.20), while CIMB is the only one of the three to be down, by about 1.6 percent (-RM0.10).
  • The pricing of the deal will set a glass ceiling for all three stocks with CIMB’s price ceiling nearest to its current price levels (although it is widening due to a selldown on the stock).
  • Current price levels versus ceiling prices (Note: Current prices are delayed)

  • As can be seen in the immediate aftermath, the market has spoken. The development is seen largely positive for RHB and MBSB, while it might be slightly negative for CIMB.
  • We are still overall positive on this development and expect the share prices of each counter to converge on the ceiling price set by the deal.
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