CIMB Group - Investment banking platform enhanced with RBS deal BUY

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD

Research House: AMMB

Price Call: BUY

Target Price: 8.00

-  We are maintainingBUY on CIMB Group Holdings Bhd (CIMB), with an unchanged fair value ofRM8.00/share, based on an ROE of 14.9% FY12F and fair P/BV of 2.1x.

-  CIMB has announcedit entered into a Sale and Purchase Agreement with Royal Bank of Scotland (RBS)on 2 April 2012 for the acquisition of selected cash equities business in eightmarkets. These comprise Australia, China, Hong Kong, India and Taiwan, equitycapital markets business and M&A corporate finance business in Australia,China (excluding any activities carried on by Hua Ying Securities Co., Ltd),Hong Kong, India, Indonesia, Malaysia, Singapore, Taiwan and Thailand.

-  Total considerationis GBP173.9mil or USD279.2mil. This seems to be higher than earlier pressreports of around USD50mil. However, the acquisition now involves a largernumber of markets. The acquisition is at a P/NTA of 0.98x while we estimate theacquisition P/BV is cheap at 0.92x. In addition, the GPB173.9mil totalconsideration included cash and receivables equivalent of GBP113.mil.

-  CIMB's rationale isto significantly scale up its investment banking presence in Asia Pacific. The additionof the RBS units will mean that CIMB will have new on-shore presence in Taiwanand Australia, as well substantially enlarged operations in Hong Kong, India andChina. We believe the deal will allow it to take a major leap forward toposition itself as a leading AsiaPacific investment bank if the merger isexecuted well.

-  We also view thisas a good opportunity for CIMB to secure a large pool of talent, in that withthis acquisition, it will be effectively acquiring 400 new investment bankingstaff from RBS. Thus, the other way to look at the acquisition would be interms of acquisition cost per employee. We estimate the acquisition priceimplies an equivalent sign-up fee of USD244,066/staff, assuming a total of 400staff from RBS will be retained. We believe this can be justified with enhancedrevenue from the merged operations later. 

-  The RBS acquisitionis neutral in terms of net impact to our forecasts, thus in financial terms,the deal is not sufficient to rerate CIMB significantly. However, we think thatacquisition valuation is cheap and allows CIMB to scale up its investmentbanking operations significantly. On a group basis overall, CIMB has earlierindicated an ROE target of 16.4% for FY12F. We have a forecast of 14.9%. CIMB'sshare price has moved up from recent lows at around RM7.00 over the past sixmonths. Rerating catalysts ahead ahead are:- (a) ability to achieve its ROEguidance for FY12F; (b) better-thanexpected non-interest income; (c)better-than-expected credit costs and NPLs. 

Source: AmeSecurities