Friday 09 Jun 2023
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AMMB Holdings Bhd’s hefty RM2.83 billion settlement with the Malaysian government in relation to the 1Malaysia Development Bhd (1MDB) fiasco has sparked speculation that the banking group may be put up as a merger and acquisition (M&A) candidate.

Will there be proposals coming in for the country’s sixth largest local banking group by assets?

CEO Datuk Sulaiman Mohd Tahir tells The Edge that there is no need for the group to merge with another as it is strong enough to stand on its own. While AMMB’s CET-1 (Common Equity Tier 1) capital ratio will fall to about 11% — the lowest among the eight local banks — after the settlement from 13.5% currently, it is still well above the minimum regulatory requirement and the group does not see an immediate need for a cash call.

Nevertheless, AMMB’s shareholders may have a different view. “Shareholders will evaluate [any proposal] and look at the value being offered, bearing in mind that it will need to go through the regulators,” says Sulaiman.

It is widely known that Australia and New Zealand Banking Group (ANZ), the largest shareholder with a 23.8% stake, is looking to exit. ANZ said last week that it would write down the value of its investment in AMMB following the settlement. The carrying value of its stake will fall to A$850 million (RM2.6 billion) from A$1.05 billion.

ANZ declined comment when The Edge reached out for an update on its options in relation to AMMB.

The second largest shareholder, AMMB chairman Tan Sri Azman Hashim, holds a 12.97% stake. He may be amenable to sell it if the offer is good, say analysts.

While some analysts point out that AMMB’s settlement has raised the possibility of a merger, with RHB Bank Bhd cited as the most probable partner, others feel that any M&A that takes place will likely not be at the banking level but at a subsidiary such as insurance or asset management.

In a recent note to clients, Credit Suisse opines that AMMB may be an M&A candidate for three reasons. “First, due to the extraordinary size of the settlement, it may be seen as wounded. Second, the possibility of an unquantifiable fine was likely the primary reason for RHB exiting merger talks three years ago. And lastly, there are a number of significant shareholders of AMMB that probably want out.”

RHB may move quickly to revisit an M&A, which would make sense on a number of grounds, says Credit Suisse. For one, a merged entity would have an estimated domestic loan market share of 16% and rank No 3 in the country. RHB is currently a distant No 4 with a 10.2% share.

“Based on a simulation exercise, an RHB-AMMB merger could be value accretive and could materially lift the estimated ROE (return on equity) and ‘fair value’ of a post-merger enlarged RHB,” it adds.

Credit Suisse estimates that RHB could enhance earnings per share (EPS) by 10% and increase ROE from 10.1% to 12.5%, assuming a cost synergy of 20%, in 2022. It notes that RHB recently surprised the market by holding back on its 4QFY2020 dividend without a credible explanation. “Major shareholders of RHB would likely be happy to be diluted in a merger exercise,” it opines.

RHB’s biggest shareholders are the Employees Provident Fund (41.63%) and OSK Group (10.1%).

The last time AMMB explored a merger was in 2017, with RHB. After months of negotiations, the two parties called it off as they were unable to come to an agreement on the terms and conditions.

Nomura Malaysia’s head of equity research Tushar Mohata believes that AMMB is unlikely to merge at the banking level currently. A key reason is that there is a large valuation gap between it and the other banks.

“Valuations may be hard to agree upon. AMMB is currently trading at a price-to-book value (PBV) of 0.5 times, while other banks have a higher PBV. So, unless the banks are willing to give [AMMB] a premium to make it a merger of equals, AMMB’s shareholders may not be willing to give up their stakes,” he tells The Edge.

“Also, the carrying value of AMMB in ANZ’s books is about RM3.72 a share after the writedown,” he adds.

AMMB’s share price stood at RM2.92 last Friday, a 7.6% drop from a week ago prior to news of the settlement, giving the banking group a market value of RM8.8 billion. The RM2.83 billion settlement was 30% of its market value pre-settlement.

“I think what is more likely is that there will be some sale at the subsidiary level. They have said in the past that they want to sell insurance and were in discussions on their general insurance business. They have also in the past explored asset management as a potential sale as well, so that may also be an option,” says Tushar.

AllianceDBS Research banking analyst Chin Jin Han notes that mergers between banks operating within the same competitive space may make less sense in the longer term compared to if they were building complementary businesses together. In the case of RHB and AMMB, both banks are actively growing their retail and SME portfolios as part of their business strategy.

“When it boils down to merging two banks with similar growth strategies, building scale through inorganic means could be more challenging than simply adding two businesses together,” he says.

Still, all eyes will be watching AMMB for news of potential M&A development, going forward.


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