AmWatch - CIMB Group : Confirms possible merger with RHB Cap and MBSB HOLD, 11 Jul 2014

SECTOR FOCUS OF THE DAY

CIMB Group : Confirms possible merger with RHB Cap and MBSB              HOLD

We maintain our HOLD rating on CIMB Group Holdings Bhd with an unchanged fair value of RM7.30/share for FY14F. This is based on an FY14F ROE of 12.7% and an unchanged fair P/BV of 1.7x.

CIMB, RHB Capital and Malaysia Building Society (MBSB) have announced yesterday the approval from Bank Negara Malaysia (BNM) to commence discussions with the aim of merging the businesses of both RHB Cap and CIMB as well as creating an enlarged Islamic Banking franchise with MBSB.

Following this, the three parties have entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure, and other relevant terms and conditions for a proposed merger of the three entities and the creation of a mega Islamic bank. The exclusivity agreement comes with an automatic extension provision upon submission to BNM on the proposal. We believe the merger will entail CIMB acquiring RHB Cap through issuance of new shares, and MBSB with cash. 

Our sensitivity analysis tables are reproduced in following pages, but now with a higher P/BV assumption for RHB Cap at 1.5x (RM10.13/RHB Cap share), instead of 1.4x (RM9.45/RHB Cap share). This leads to a possible fair value of RM7.50/share for CIMB (assuming acquisition of MBSB with cash). 

As for the creation of a mega-Islamic bank, we expect this to be housed under CIMB Islamic. As it is, Maybank is estimated to have the largest market share of Islamic assets, at 28.8%, followed by CIMB Islamic (11.4%) and RHB Islamic (6.7%). As for MBSB, we have assumed its Islamic assets to be its personal loans portfolio, given there were no further details, and estimated MBSB’s market share at 5.4%. Following the merger, the enlarged CIMB Islamic is still ranked second behind Maybank.

We believe the creation of a mega-Islamic bank will presumably allow CIMB Islamic to bulk up its balance sheet and enable it to compete for investment banking mandates. On balance, without adding in synergies, we find that our fair value for CIMB is broadly unchanged. We are therefore neutral on the possible merger. 

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