KUALA LUMPUR (Oct 9): Analysts said while the possible acquisition by Public Bank Bhd (KL:PBBANK) may be value accretive, it does not overshadow the bank’s robust asset quality and attractive dividend yield.
Notably, The Edge reported on Tuesday that Public Bank is expected to undertake an acquisition of a company related to its operations, which may be tied to its principal’s insurance unit, LPI Capital Bhd (KL:LPI).
Kenanga said while waiting for further clarity following the suspension of both Public Bank and LPI on Wednesday, it kept its “outperform” rating and a target price (TP) of RM5.10 for Public Bank, based on an unchanged GGM (Gordon growth model)-derived price-to-book value (PBV) of 1.54 times.
This includes considerations like cost of equity (COE) at 9.9%, terminal growth (TG) at 4.0%, and return on equity (ROE) at 13.0%, against a forecasted book value per share (BVPS) of RM3.14 for FY2025.
The house said that Public Bank is anticipated to continue leading in gross impaired loan (GIL) ratios due to its densely collateralised housing loan portfolio.
In terms of insurance, Kenanga noted that Public Bank’s involvement is mainly through its 30% stake in AIA Public Takaful, offering family takaful products.
Kenanga noted that LPI’s general insurance business holds about a 7% market share, based on Bank Negara Malaysia’s 1H2024 Financial Stability Review.
Although LPI’s market share is not overly dominant, Kenanga speculates that Public Bank might seek further opportunities in this sector.
Based on LPI’s market capitalisation of RM5.18 billion as of the previous day, this equates to a 2.3x PBV, which is higher than the average PBV of 1.5x for local insurers but below Kenanga’s TP-related PBV of 2.6x.
Acquisition may involve cash and shares to mitigate dilution of MI
Kenanga suspects that any potential acquisition might incorporate cash and share swaps to mitigate significant dilution of minority interests (MI).
It noted that Public Bank has a cash reserve of RM12.4 billion, which could support various modes of acquisition.
“Regardless, we are mindful of the impact to the group’s regulatory capital, depending on the mode of acquisition. Per our understanding of regulatory capital rules, acquiring an insurance company entails a more punitive treatment that requires the deduction of the entire investments for LPI from Public Bank’s capital level...”
As such, Kenanga said that this could notably drop Public Bank’s 15.1% Common Equity Tier 1 (CET-1) ratio by about 150 basis points, still above the minimum target of 13.0%.
Furthermore, non-insurance acquisitions could target digital assets and lifestyle services to attract younger consumers, similar to existing offerings like the MAE (Maybank Banking Bhd (KL:MAYBANK) e-wallet) and the Touch 'n Go (TNG) e-wallet, it added.
In a separate note, MIDF Research was neutral, with a slightly positive inclination towards the rumoured acquisition.
Although it might unlock synergies through customer network leveraging and product bundling, they maintain a “buy” call with a TP of RM5.16, emphasising Public Bank’s strong asset quality and solid dividends.
MIDF noted that acquiring LPI would be quite unexpected, as banks typically engage in insurance via bancassurance, and some have recently exited the insurance business.
If true, the complete acquisition of LPI by FY2025 could mildly increase Public Bank’s earnings, it added.
MIDF predicts a 5% boost to Public Bank’s FY2025 earnings, raising their ROE by 0.4 percentage points. In their valuation, this potential acquisition only improves the TP by one sen to RM5.17.
The transaction shouldn’t be complicated, given Public Bank’s substantial market capitalisation in comparison to LPI’s. Additionally, there should be limited impact on Public Bank’s CET-1 ratio, with only a slight decrease expected.