How much is RHB Bank really worth?

by **Cals** Mon 21 Jul 2014, 02:16

Published: Saturday July 19, 2014 MYT 12:00:00 AM
Updated: Saturday July 19, 2014 MYT 9:17:55 PM
[size=40]How much is RHB Bank really worth?
BY RISEN JAYASEELAN[/size]
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THE proposed creation of Malaysia’s biggest banking group drills down to a basic question – how much is RHB Bank really worth?
In other words, will CIMB Group’s valuation of RHB Bank be a figure that is palatable to shareholders of the latter, in particular the Abu Dhabi-based Aabar Investments?
CIMB Group recently began negotiations with RHB Capital Bhd (owner of RHB Bank) and Malaysian Building Society Bhd (MBSB) for a merger of all three parties but reports have highlighted that Aabar, which owns 21% in RHB Cap, seeks a price higher than their cost of RM10.80 per share.
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[size=12]CIMB headquarters in Kuala Lumpur. The group has recently began negotiations with RHB Capital Bhd, the owner of RHB Bank, and Malaysian Building Society Bhd for a merger of all three parties.

Indications though point to a deal being struck that values RHB Cap at around the RM10.80 level, meaning the absence of any significant premium to Aabar’s cost.

“Aabar is likely to support the deal if it values RHB Cap at around RM10.80. This is because they (Aabar) realise that their RHB Cap investment hasn’t been going anywhere for a long time. With a share swap, Aabar would now be holding equity in the largest banking group in the country and potentially the region. That’s a much more attractive position to be in,” says an investment banker.
Bankers also note that Aabar’s block of shares in the merged entity would now become much more “liquid” than its RHB Cap holdings, considering that there may be much more interest in buyers of shares of the country’s largest bank that could potentially become a regional giant.
The same applies to another substantial shareholder of RHB Cap, namely Tan Sri Ong Leong Huat, whose’s OSK Holdings Bhd could see this development as an attractive opportunity to cash out from its 10% in RHB Cap at attractive valuations once the merger is complete.
Aabar had forked out RM10.80 per RHB Cap share, valuing the bank then at 2.25 times book, when it acquired the block from sister company Abu Dhabi Commercial Bank back (ADCB) in 2011.
ADCB, in turn, had also paid 2.2 times book value when it first bought into RHB Cap in 2008 at RM7.20 per share. While that price seems toppish, it was struck at a time when asset prices weren’t impacted yet by the collapse of Lehman Brothers and Bear Stearns. Recall also that in 2005, Bumiputera Commerce Holdings Bhd had valued Southern Bank Bhd at 2.07 times book value when it acquired the latter.
The RM10.80 price tag for RHB Cap now values it at around 1.6 times book value.
Notes a person close to the current merger proposal: “It doesn’t make sense for CIMB to offer the kind of valuation that it itself commands because there is a difference between the two financial institutions. The market has always offered a higher price-to-book value to CIMB as opposed to RHB.”
Since 2008, RHB Cap’s shares have traded at an average price-to-book ratio of 1.35 times book in the last three years (see chart), not coming anywhere close to the 2.2 times book value the Abu Dhabi funds paid.
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Indeed, one observer says Aabar’s options are limited. “Aabar can continue to hold on to its RHB Cap shares but it is not likely to get a better valuation in the future. The converse may happen as the value of its holdings in RHB Cap could deteriorate. Other banks could overtake RHB Cap.
“Take note also that our banking system is a highly regulated one, so it will be difficult for it to just try and divest its block to a party of its choosing as Bank Negara would have to be convinced of the suitability of that partner in RHB Cap’s shareholding,” the observer says.
Also, with Basel 3 coming into force, there is a capital cost to Aabar if it continues to hold a stake in RHB Cap, says a banker.
Credit Suisse reckons that the deal would price RHB Cap at 1.5 times its book value. “Given that Aabar paid RM10.80 per share for its stake in RHB Cap, we assume that the merger will only be doable if CIMB is prepared to offer that price, which translates into 1.5 times book value.”
As for CIMB, the market values it around 1.7 times its book value. Hence it only makes sense for CIMB to be buying a smaller bank, with a smaller loan portfolio and smaller growth, at a slightly lower price that its own value.
CIMB tips RHB on many benchmarks ranging from market share of loans, branches, deposits and current and savings accounts numbers, not to mention by market capitalisation and asset size. From 2009 to 2013, CIMB’s bottom line grew at a compounded annual growth rate (CAGR) of 12.04% compared with RHB Bank’s 8.8%.
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Are Malaysian banks expensive?
Comparatively though, paying 1.6 times book value for any bank isn’t a cheap price either, if viewed in the global context.
Major banks in the United States trade at around 1 times book, while the average price-to-book ratio for banks in Singapore are 1.22 times, and a mere 0.87 times in Hong Kong. Only Indonesia, possibly due to its large untapped population, trades at an average of 2.27 times, which is higher than Malaysia’s 1.78 times.
This merger plan, it is learnt, had surfaced in a short span of time, despite a previous failed attempt back in 2011.
Hence insiders say CIMB Group is now actively inking out its rationale and value proposition for the marriage, which will be presented to the boards of RHB Cap and MBSB soon.
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Tan Sri Azlan Zainol, the former head honco of the Employees Provident Fund (EPF) and current chairman of RHB Bank Bhd, said on Thursday that negotiations have yet to begin and that the three month exclusivity period was a request made by CIMB Group. He did not rule out RHB Cap speaking with other bidders later on.
Pricing issues aside, the merger is aimed at achieving synergies and economies of scale. Achieving those, however, are never easy. Sceptics often point out that mergers and acquisitions (M&As) never really achieve their intended value creation.
Other challenges also lurk in the background: Will there be a buy-in by the staff of all the three entities and how will the unions react? Will customers also like what they see.
Yeoh Keat Seng, a senior fund manager with Kumpulan Sentiasa Cemerlang Sdn Bhd, says: “The deal could face multiple obstacles, ranging from winning support from all stakeholders for the initial approval to executing and generating meaningful synergies and to holding on to its key staff in the meantime.
“They would also have to offer reassurances to the unions on the one hand and yet contend with the fact that synergies will be limited if they can’t ‘right size’ the enlarged entity”.
On the other hand, CIMB Group and its leader Datuk Seri Nazir Razak have a lot of M&A experience considering their dynamic acquisitive growth strategy.
“Remember that the origins of CIMB was a small investment bank called Commerce International Merchant Bankers. Only through aggressive M&As has it grown into second position today,” says a former banker.
Tan Sri Chua Ma Yu, a stock market veteran, notes that CIMB has the best track record in banking mergers in the country.
“CIMB has an excellent track record in consolidating banks. It handled the very challenging merger with Bank Bumiputra Malaysia Bhd and also successfully integrated Southern Bank Bhd into its operations. Not many can lay claim to that,” Chua says.
A defensive merger?
The merger plan has brought attention to the Malaysian banking scene. An international publication though criticised the proposed merger on the basis that CIMB’s 2012 acquisition of Royal Bank of Scotland’s Asian business has yet to achieve its desired results.
A foreign-based banker also reckons that the planned deal hides slow growth in Malaysia. “Given low growth prospects, lack of regional scale, a potential credit crunch in Malaysia, which is the largest market for both banks, this merger is defensive in nature in that it masks a lack of future growth for all three banks,” he says.

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Chua: ‘CIMB has an excellent track record in consolidating banks.
Credit Suisse though is positive on the deal, calling it a win-win for CIMB and RHB. It points out that assuming CIMB pays a 20% to 24% premium to market price for RHB and MBSB, it estimates the deal to be “only 1%-2% dilutive for earnings per share (EPS) and could be EPS accretive if we factor in potential synergies.”
It adds: “Given CIMB’s proven track record on acquisitions and improving risk profile for its Indonesian business, we reiterate our outperform call on CIMB.”
Credit Suisse also points out that the merged entity would become the country’s largest bank with total assets amounting to RM614bil versus Maybank’s RM578bil and a loan market share of 24%, against Maybank’s 19%.
It also envisages that the enlarged merged entity could have a RM94bil market capitalisation versus Maybank’s RM90bil.

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Yeoh: ‘The deal could face multiple obstacles.
An analyst says that the merger, if executed well, will give the new banking group “scale to do things at lower cost”.
And as fund manager Yeoh says, this merger could be the first big leap into bigger things yet. “If they pull it through successfully, their next target could be a large regional bank. The prize for a deal like this is to finally put a Malaysian bank as one of the top three players in Asean,” he says.
It is prospects like this which are likely to nudge the only possible opponent to this mega banking merger, namely Aabar, to join the party and vote it through.
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