Monday June 13, 2011

RHB ‘war’ may not happen as Maybank and CIMB would not want to overpay

PETALING JAYA: A bidding war for RHB Capital Bhd may not materialise as both Malayan Banking Bhd (Maybank) and CIMB Group would be mindful of overpaying, said a research house.

In a report on Friday, OSK Research said assuming a majority share swap funding scenario, all things being equal and on current share price levels (Maybank at RM8.75, CIMB at RM8.35), it estimated that the merger would still be marginally earnings per share accretive if Maybank and CIMB were to offer up to RM10.80 and RM11.30 per RHB Capital share respectively.

“CIMB's higher price to book value of 2.3 times versus Maybank's 2.1 times gives CIMB more share swap pricing power,” the research house told clients.

RHB Bank is operated by RHB Capital

In its report, the research house said that however, given the downside risk on return on equity post merger and limited synergistic upside, it believed that both banks were likely to display pricing discipline, which in its view could cap the offer pricing for RHB Cap below the 2.25 times price to book value multiple.

This would translate into a potential offer pricing cap of RM10.80, or about a 9% premium to RHB Capital's current share price of RM9.90.

RHB Capital's relatively high double leverage of 150% may also be something which potential suitors would want to price into their valuation and consider the impact on the enlarged group's capital ratios post implementation of Basel 3, OSK noted.

In its report, OSK also touched on the ongoing consolidation in the local banking sector.

The research house said that the consolidation would certainly widen the scale disparity of the top four domestic full fledged commercial banks with that of the smaller domestic banks.

Currently, the top four banks are Maybank, CIMB, Public Bank Bhd and the newly merged entity of Hong Leong Bank Bhd and EON Bank Bhd.

“As such, it would make commercial sense for the smaller banks to merge with one another to develop scale,” OSK said.

Having said that, the research house said it believed that smaller banks would still be able to survive if they were able to be innovative and continue to develop a strong consumer-centric culture and niche markets.