March 10, 2011

RHBCAP - Next wave of M&A for Malaysian banks

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD
Research House: HWANGDBS

Banking sector
We are not just implying temporary value enhancement in banks for the sake of taking advantage of potential general offer valuations. The target banks will benefit from input the potential stakeholders could bring to the table to improve stand-alone value propositions, for example AMMB Holdings Bhd-Australia and New Zealand Banking Group Ltd. We believe nimble banks such as RHB Capital Bhd and Alliance Financial Group Bhd (AFG) are ripe for M&A with new strategic shareholders, given their attractive valuations (1.5 times to 1.6 times CY11 book value) and return on equity (ROE) profiles (14% to 15%).

Prime Minister Datuk Seri Najib Razak said the foreign shareholding cap for local commercial banks will be evaluated on an individual merit basis. There will be no changes to the Banking and Financial Institutions Act for now. If the foreign shareholder limit is raised to 49% from 30% currently, the move would give a positive swing to Malaysian banks, as it could potentially open doors to maintain competitiveness and new strategic partnerships, which could further enhance the value of Malaysian banks. On this note, our bets are on AFG ('buy', target price: RM3.85) and Affin Holdings (not rated).

We believe loan growth will continue to support net interest income growth amid competitive net interest margins, while non-interest income should gear up on capital market activities.

Our pick for regional Malaysian banks is Malayan Banking Bhd (Maybank) ('buy', TP: RM10.80). Maybank still offers an element of positive surprises and carries Indonesia as a multi-year growth story. We also like RHB Capital ('buy', TP: RM10) for its attractive valuation and ROE profile, as well as possible M&A angle. AFG is our new small cap M&A pick ' if Langkah Bahagia exits, it could see a new strategic shareholder. ' HwangDBS Vickers Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

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