This article first appeared in The Edge Financial Daily on June 2, 2017 - June 8, 2017
PETALING JAYA: RHB Bank Bhd and AMMB Holdings Bhd’s merger plan involves RHB buying all of the latter’s assets and liabilities in an all-share deal. RHB told analysts that it hoped to do the deal at one-time book value (BV).
RHB group managing director and chief executive officer (CEO) Datuk Khairussaleh Ramli, in an analyst briefing yesterday, said it would be issuing shares for AMMB’s assets and liabilities, and stressed that there would be no cash involved.
This throws up questions as to how AMMB’s largest shareholder Australia and New Zealand Banking Group Ltd (ANZ), which has been looking to sell its 23.78% stake, will exit. ANZ said last November that it planned to sell its stake over the next 12 to 18 month.
An industry observer noted that as much as ANZ would likely want a cash exit, it would be too costly for RHB. “Both banks are trading just under one-time book value now, so if a share deal happens at book value, ANZ and any other shareholder could exit at a later date,” the observer opined.
Khairussaleh told analysts that this was the right time for the two banks to go into a merger, particularly because both are trading at close to their BVs. “So, if we can do it at book, that will be great. We minimise goodwill to optimise the financial outcome,” he said.
An all-share deal would be less dilutive, according to a banking analyst who attended RHB’s briefing. “They expect to overcome dilution in two to three years,” he said.
In a report yesterday, DBS Group Research noted that in May last year, ANZ wrote down its investment in AMMB to 0.9 times BV, which fuelled speculation that ANZ might be willing to relinquish its stake for as low as one-time BV.
Sources said there is a strong possibility that the Employees Provident Fund (EPF), which is the common shareholder in both banks, will end up being the biggest shareholder of the merged entity. It currently has a 40.7% stake in RHB and 9.91% in AMMB.
RHB and AMMB, in separate stock exchange filings yesterday, said they had obtained Bank Negara Malaysia’s approval, which is valid until Nov 30, to start discussions for a possible merger of their “business and undertakings”.
This confirms a report in the The Edge Malaysia weekly’s March 20 issue that cited sources as saying that the two were exploring a merger and that there had been preliminary talks among some of their key shareholders.
The two banks have now entered into a three-month exclusivity agreement, which expires on Aug 30, to negotiate and finalise the pricing, structure, and other terms and conditions. They said there could be an automatic extension of the exclusivity period, if needed.
“It is envisioned that the transaction will effectively be an all-share merger,” they said in a joint press statement yesterday.
In the statement, Khairussaleh said: “We are confident that if the proposed merger takes place, it will create greater synergy for the enlarged banking group, benefiting our shareholders, customers, employees and all other stakeholders.”
He told analysts that the merger would make the group No 1 in asset management, general insurance and equities broking, and No 2 in Islamic banking. It would also make it the 9th largest bank by assets in Asean, creating a bigger platform for it to grow further at home and regionally.
In an email to staff yesterday, Khairussaleh stressed that it would be business as usual at RHB. “To be able to compete effectively in the banking industry, and provide the platform for future growth, we believe that having scale to our business is key. A merger will help accelerate this objective,” he said. Should the discussions lead to a merger, he assured the staff that the group would take the necessary steps to ensure a smooth integration of RHB’s business and operations with that of AMMB.
At a town hall meeting with senior staff, he said that if all went well, the parties hoped to get the deal completed within a year.
Meanwhile, AMMB, in its town hall with senior staff, said it would be good for the group to move up in the size rankings. RHB and AMMB combined would have total assets of RM365.88 billion, only slightly behind the third largest banking group Public Bank Bhd’s RM380.05 billion. AMMB, on its own, is the sixth largest.
“This new chapter that is opening in the AmBank Group’s history, comes at an opportune time for us as we have been moving closer to achieving our Top 4 goals. I am positive that the proposed merger with RHB will create a stronger business and financial presence. Our combined strength in key business segments, particularly in retail and investment banking, will bode well for us as we move forward to achieve our goal of becoming a formidable banking group,” its group CEO Datuk Sulaiman Mohd Tahir said in the press statement.
Apart from the EPF, RHB’s other major shareholders are Aabar Investments PJS (17.75%) and OSK Group’s Tan Sri Ong Leong Huat (10.13%).
Over at AMMB, founder and chairman Tan Sri Azman Hashim holds a 12.97% stake. He is retiring from all his positions within the group over the next two years, and hence, likely to be more open to paring down his stake.
UOB Kay Hian Research, in a report early yesterday, opined that the merger would require a fair degree of cost rationalisation given the amount of operational and revenue duplication between AMMB and RHB.
“The combined entity will have 453 branches versus Maybank’s 363 branches. Both banking groups have sizable corporate and investment banking franchise. Post merger, RHB’s cost-to-income ratio, Casa (current account savings account) ratio and loans-to-deposit ratio would deteriorate, given AMMB’s poorer financial metrics in these areas.
“In terms of loans profile, RHB would experience a slight uptick in overall consumer loans composition from 46.8% to 49.7%, as a result of AMMB’s relatively larger auto loans portfolio. Given such a scenario, the synergies of the merger will have to come from a cost angle which was a key hurdle to the previous proposed merger between CIMB-RHB-Malaysia Buildings Society Bhd,” it said.
Both the stocks of AMMB and RHB will resume trading today.
“As the revenue synergies between the two groups are not compelling, we expect the market to react negatively to the acquirer, assuming it is unable to reap the full cost rationalisation benefits. Sentiment on AMMB would depend on whether there is a cash option for shareholders to exit,” UOB Kay Hian said.
RHB stock, which has gained 15% so far this year, last closed at RM5.39, trading at a price-to-BV (PBV) of 0.97 times. AMMB’s has gained over 20% and last closed at RM5.21, trading at a PBV of 0.98 times.