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Monday 3 October 2011

RHB's best fit - Investment or commercial bank?

Hong Leong Investment Bank Research believes a takeover would be positive for RHBCap as it would give the group an immediate investment banking presence in the region

Read more: RHB's best fit - Investment or commercial bank? http://www.btimes.com.my/articles/rhbosk-2/Article/#ixzz1ZiXGN6bu
Kuala Lumpur: Lender RHB Capital Bhd's (RHBCap) plan to merge with regional investment bank OSK Group has some merits, analysts say, but some wonder if RHBCap might be better off partnering a commercial bank instead. RHBCap and the OSK Group took the market by surprise late Thursday when they each said they had applied to the central bank for permission to start merger talks. While it is still too early for details, analysts are assuming that RHBCap will be the party to undertake the takeover given that it is the larger entity. Hong Leong Investment Bank Research believes a takeover would be positive for RHBCap as it would give the group an immediate investment banking (IB) presence in the region, namely in Hong Kong, Shanghai, Phnom Penh and Jakarta. RHBCap is largely domestic now, and recent moves to venture overseas - by planning to buy small Indonesian lender Bank Mestika - have stalled due to potential changes to Indonesia's banking rules pertaining to ownership thresholds. RHBCap and OSK combined would also have a formidable stockbroking business, overtaking CIMB Investment Bank at home to become the largest broker by market share. OSK also has equities businesses in Singapore (via DMG and Partners), Indonesia and Hong Kong, and a commercial banking business in Cambodia. It manages some RM7.5 billion under its asset management business. The acquisition would allow RHBCap to double its stockbroking revenues in Malaysia and expand into Singapore and Indonesia as well as boost its asset management business, Julian Chua, an analyst at Nomura Securities, said in a report. In a nutshell, a merger with OSK would help RHBCap build up its IB franchise in the region, echoing moves of its larger rivals Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd. Maybank recently bought regional broker Kim Eng to boost its IB business, while CIMB Group bought Singapore's GK Goh Securities some years earlier. This week, CIMB Group also announced plans to buy a 70 per cent stake in a Thai brokerage. RHBCap's merger move indicates that it does not want to be left out in the capital market race. We think (it) is taking the opportunity of current market conditions to commence negotiations, HwangDBS Vickers said in a research note. It noted that recent merger and acquisitions relating to stockbrokers have ranged between 1.4 times and 1.9 times book value. (Maybank's purchase of Kim Eng was done at 1.9 times book value). Taking similar valuation ranges, it said the takeover of OSK could cost RHBCap between RM2.1 billion and RM2.8 billion. At RM2.8 billion, OSK would be valued at around RM3 a share. We estimate such an acquisition would be earnings-neutral (to RHBCap) but are concerned about the potential impact it may have on the group's core equity capital, Chua said. Still, some analysts think RHBCap should opt for a commercial banking partner. Even though it is one way to get their overseas venture going, we never thought they would go for an investment bank. We thought they'd buy another commercial bank and then only move to build up their investment banking business because they'd then have the client base to ride on, said one from a foreign research firm The analyst, like many others, felt that lender AMMB Holdings Bhd would be the best fit for RHBCap, but acknowledged that AMMB's major shareholder ANZ was unlikely to be interested as it already has stakes in regional banks. Maybank and CIMB each walked away from exploratory merger talks with RHBCap earlier in June over concerns on pricing. The dealbreaker was RHBCap's biggest shareholder Abu Dhabi Commercial Bank's move in selling its 25 per cent stake to a sister company at a hefty RM10.80 a share, which set the valuation bar too high for a merger to happen. OSK has been looking for a buyer for some time now and would be willing to sell at the right price, analysts said. Ong Leong Huat is the single largest shareholder of OSK Holdings Bhd with a 32.2 per cent stake. Pricing and how the deal is to be structured will be key, said one. RHBCap's share price yesterday eased 16 sen to RM7, while OSK Holdings' surged by 17 sen to RM1.56.

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