Maybank IB Research

PP16832/04/2011 (029339)

Acquisition / Disposal 4 April 2011

RHB Capital Merge AMMB & RHB Cap? Why not….

Buy (unchanged) Could it, should it, would it? Could the merger take place? We think
Share price: RM8.72 it is plausible, for it would tie in with aspirations for further consolidation
Target price: RM9.50 (from RM9.40) in the industry and the creation of larger banks. Should AMMB and
RHB Capital merge? We believe such an exercise could be earnings
accretive and synergistic. Would it happen? That’s the billion Ringgit
question … that we will have to leave open-ended. We maintain a Buy
on RHB Capital with a marginally higher TP of RM9.50 (from RM9.40)
AMMB Holdings and a Hold on AMMB (TP: RM6.80) for now.
Our scenario. Our scenario assumes a two-step process whereby
Hold (unchanged) ANZ acquires ADCB’s entire 25% stake in RHB Capital, which is then
followed by AMMB’s acquisition of RHB Capital’s assets and liabilities
Share price: RM6.57
via a share exchange. Our revised TP for RHB Capital implies a
Target price: RM6.80 (unchanged) forward P/BV of about 1.8x, which is what we have assumed to be a
fair price for the acquisition by AMMB. This would price ADCB’s 25%
stake in RHB Capital at RM5.1b. For the share exchange, we have
Wong Chew Hann, CA assumed a P/BV of 1.8x for both banks.
wchewh@maybank-ib.com
(603) 2297 8686 Implications to shareholdings. In the above scenario, ANZ’s
shareholding in the enlarged group would expand marginally to 24.4%
from 23.8% but the entity would then be double in asset size. More
importantly, we would expect ANZ to still play an active role in running
Description: Banking. the operations of the enlarged group. The EPF’s stake in AMMB would
effectively more than double to 28.6% from 13.2% presently, by virtue
Information:
of its present 44.6% stake in RHB Capital. Tan Sri Azman Hashim’s
Ticker: RHBC MK
Shares Issued (m): 2,153.5 stake in the enlarged AMMB would dilute to 8.5% from 16.8%.
Market Cap (RM m): 18,778.3
3-mth Avg Daily Volume (m): 3.51 Earnings accretive, though initially dilutive on ROEs. We estimate
KLCI: 1,555.38
an 8.4% enhancement to group EPS on consolidation. We expect an
Major Shareholders: % initial dilution in AMMB’s FY13 ROAE from 13.3% to 10.2%, but with
EPF 44.6 room for potential cost savings – every 10% reduction in overheads
Abu Dhabi Commercial Bank 25.0
would result in a 1%-pt improvement to ROEs. Meanwhile, P/BV would
decline correspondingly to reflect the lower ROEs. At our assumed
Price Performance: share exchange price of RM6.97 (P/BV of 1.8x for AMMB pre-merger),
52-week High/Low RM8.76/RM5.55 the enlarged AMMB would trade at a prospective P/BV of 1.2x which
1-mth 3-mth 1-mth 3-mth 1-mth
we think is fair for now, to compensate for the lower ROAE of 10.2%.
10.5 9.8 10.5 9.8 10.5
Areas of synergy; re-rating subsequently? Size aside, a merger
would balance off the clientele mix of both banks and result in a more
Price Chart (RM8.72)
well-distributed loan portfolio. AMMB brings to the table its strength in
9.0 insurance while RHB Capital offers its larger treasury operations and
RHBC MK Equity
contributions from overseas operations. As the enlarged AMMB reaps
8.5 synergies from the exercise, we believe there is every room for the
stock to re-rate up. Being the third biggest in asset size post merger,
8.0 and as the enlarged AMMB works towards a mid-teens ROAE over the
next few years, valuations could close against that of the country’s two
7.5 largest banking groups as returns improve.
Nov-10 Dec-10 Jan-11 Feb-11 Mar-11
 RHB-AMMB

AMMB HOLDINGS RHB Capital – Summary Earnings Table

FYE Dec (RM m) 2009A 2010A 2011F 2012F 2013F
Description: 23.8%-associate of ANZ Banking Group Operating Income 3,665.0 4,050.3 4,406.9 4,902.8 5,360.7
offering the full range of universal banking services in Pre-provision Profit 2,099.2 2,410.6 2,620.8 2,946.0 3,222.2
Malaysia with investment banking operations in Indonesia Recurring Net Profit 1,538.4 1,899.3 2,148.4 2,405.2 2,665.9
and Singapore. Recurring Basic EPS 1,183.8 1,516.8 1,606.2 1,798.2 1,992.8
(sen)growth (%)
EPS 55.0 70.4 74.6 83.5 92.5
Information:
Gross DPS (Sen) 11.8 28.1 5.9 12.0 10.8
Ticker: AMM MK
Shares Issued (m): 3,014.2 PER (x) 15.9 12.4 11.7 10.4 9.4
Market Cap (RM m): 19,803.2 Div Yield (%) 2.6 3.0 3.4 3.8 4.2
3-mth Avg Daily Volume (m): 6.85 P/BV (x) 2.2 1.88 1.7 1.5 1.3
KLCI: 1,555.38
Book Value (RM) 4.04 4.63 5.26 5.99 6.78
Major Shareholders: % ROE (%) 14.5 15.2 15.1 14.8 14.5
ANZ 23.8 ROA (%) 1.1 1.2 1.2 1.2 1.2
AmcorpGroup Bhd 16.8
EPF 13.1 Consensus Net Profit 1,614.6 1,855.8 2,033.0
Prudential Plc 6.0 (RMm) Maybank IB
Source:
Price Performance:
52-week High/Low RM7.18/RM4.65
AMMB Holdings – Summary Earnings Table
FYE Mar (RM m) 2009A 2010A 2011F 2012F 2013F
1-mth 3-mth 6-mth 1-yr YTD Operating Income 2,927.6 3,577.8 3,924.5 4,267.4 4,665.8
5.8 8.6 34.1 31.7 (6.5) Pre-provision Profit 1,658.8 2,076.4 2,304.9 2,537.1 2,817.0
Recurring Net Profit 1,217.6 1,376.7 1,835.5 1,990.7 2,226.4
Recurring Basic EPS 957.6 1,138.7 1,323.2 1,473.3 1,648.5
(sen)growth (%)
EPS 35.2 39.2 43.9 48.9 54.7
Price Chart (RM6.57)
Gross DPS (Sen) 7.2 11.4 12.0 11.3 11.9
7.5 PER (x) 18.7 16.8 15.0 13.4 12.0
AMM MK Equity Div Yield (%) 1.2 1.6 2.3 2.6 2.9
7.0 P/BV (x) 2.3 2.1 1.9 1.7 1.5

6.5 Book Value (RM) 2.84 3.20 3.52 3.87 4.26

ROE (%) 11.6 11.6 13.2 13.0 13.3
6.0 ROA (%) 1.0 1.1 1.3 1.3 1.3
Consensus Net Profit 1,326.3 1,516.9 1,747.7
5.5 (RMm) Maybank IB
Source:
Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

4 April 2011 Page 2 of 9

 RHB-AMMB

Current shareholding structure

The major shareholders of both AMMB and RHB Capital are

highlighted below. As expected, the EPF’s stake in RHB Capital has
come off from 56% in March 2010 to 44.6% presently, the bulk of it via
placements of existing RHB Capital shares to substantially foreign
investors in December 2010. The aim is to reduce this to 40%. EPF has
nevertheless topped up slightly on its stake in AMMB to 13.2% (12.4%
in June 2010).
Current shareholdings
Shares (‘000) Holdings (%)
AMMB Holdings
ANZ Banking Group 716,841 23.8%
Amcorp Group 505,781 16.8%
EPF 396,551 13.2%
Prudential 180,037 6.0%
Others 1,214,975 40.3%
3,014,185 100.0%

RHB Capital
EPF 959,961 44.6%
Abu Dhabi Commercial Bank 538,369 25.0%
Others 655,145 30.4%
2,153,475 100.0%
Source: Companies, Maybank IB

The scenario

AMMB acquires RHB Capital. There are undoubtedly various

permutations, but we have simplistically assumed that:

 ANZ acquires ADCB’s entire 25% stake in RHB Capital,

 AMMB acquires RHB Capital through the asset-liability route and

via an exchange of AMMB shares for RHB Capital.

Why should AMMB be the acquiror? In our view, this is because:

 Pricing would likely be an easier issue to settle, given that the EPF
and ADCB now control close to 70% of the shares in RHB Capital.
Moreover, there appears to be a willing seller in ADCB.

 The deal would likely be more earnings accretive to AMMB, whose

valuations are higher than that of RHB Capital. AMMB presently
trades at a prospective CY11 PER of 13.2x versus 11.3x for RHB
Capital.

 Asset wise, there is not that much disparity in size between the two
– AMMB’s asset base totaled RM105.0b as at end-2010 versus
RM129.3b for RHB Capital.

4 April 2011 Page 3 of 9

 RHB-AMMB

At what price and cost?

RM4.8b-RM5.1b for ADCB’s stake. Our revised DDM-derived target

price of RM9.50 for RHB Capital implies a forward P/BV of 1.8x, which
we believe is a fair value for the banking group. AMMB currently trades
at a prospective FY12 P/BV of 1.7x, which is also about the value that
ANZ paid for its stake in the group of 1.6x-1.7x. We forecast a 2011
BV/share of RM5.26 for RHB Capital. At a P/BV of 1.7x-1.8x, this would
price ADCB’s stake in RHB Capital at RM4.8b-5.1b.

Cost to acquire ADCB’s 25% stake

P/BV (x) 1.7 1.8
2011 Book Value (RM) 5.26 5.26
Cost/share (RM) 8.94 9.47

Shares to acquire ('000) 538,369 538,369

Acquisition cost (RM'm) 4,814 5,097
Source: Companies, Maybank IB

AMMB to issue shares for RHB Capital?

Assumed similar pricing P/BV of 1.8x for both AMMB and RHB
Capital. On the back of this assumption, the value of both banking
groups is about equal at RM20.4b for RHB Capital and RM21.0b for
AMMB. Assuming the issue of new AMMB shares for the acquisition,
we estimate that AMMB would have to issue 2.9b new shares for RHB
Capital’s entire assets and liabilies, effectively almost doubling AMMB’s
existing share capital base.

No. of shares issued

RHB Cap AMMB
FY12/11 & FYE3/12 BVPS (RM) 5.26 3.87
P/BV (x) 1.8 1.8
Value/share (RM) 9.47 6.97

No. of shares o/s (m) 2,153.5 3,014.2

Total value of company (RM'm) 20,389.1 20,996.8

No. of new AMMB shares issued (m) 2,926.9

AMMB's enlarged SC (m) 5,941.1
Source: Maybank IB

4 April 2011 Page 4 of 9

 RHB-AMMB

Implications to AMMB’s shareholding structure?

1.36 AMMB shares for every 1 RHB Capital share. With an

outstanding share capital of 2,153.5m shares, AMMB would have to
issue 1.36 new AMMB shares for every 1 RHB Capital share. The
distribution of AMMB shares would be as per the table below.

Shares received in AMMB

RHB Capital's Shares in RHB % of total New shares in
shareholders Cap (m) AMMB (m)

EPF 959,961 44.6% 1,304,754

ANZ 538,369 25.0% 731,736
Others 655,145 30.4% 890,455
2,153,475 100.0% 2,926,945
Source: Bursa, Maybank IB

Post merger, EPF would be largest shareholder in AMMB. EPF

would emerge with a 28.6% stake in AMMB (from 13.2%) while ANZ
would see a marginal increase in its shareholding to 24.4% from
23.8%. Amcorp would see its stake dilute to about 8.5%.

Shareholdings in AMMB
Before After
Shares ('000) Shg (%) Shares ('000) Shg (%)
ANZ 716,841 23.8% 1,448,578 24.4%
Amcorp Group 505,781 16.8% 505,781 8.5%
EPF 396,551 13.2% 1,701,304 28.6%
Prudential 180,037 6.0% 180,037 3.0%
Others 1,214,975 40.3% 2,105,430 35.4%
3,014,185 100.0% 5,941,130 100.0%
Source: Bursa, Maybank IB

What then does ANZ get out of it? Although the stake increase for
ANZ may appear negligible, ANZ would nevertheless be acquiring RHB
Capital at decent valuations of about 1.8x, while maintaining its
shareholding in a financial institution which is now effectively double in
size. Rather than raise its stake in AMMB to 49%, this is a neat
compromise, in our view, and we would still expect ANZ to play an
active role in running the operations of the enlarged group.

4 April 2011 Page 5 of 9

 RHB-AMMB

Would the acquisition be accretive?

We think it is accretive to earnings … On a proforma basis, we

expect combined earnings of the group to be 114% larger than that of
AMMB on a stand-alone basis. We also estimate an 8.4%
enhancement to group FYE3/2013 EPS as a result.

Combined group earnings for FYE3/13E

AMMB RHB Cap* Combined Chg

Interest income 5,190 7,145 12,335
Interest expense (2,858) (3,721) (6,579)
Net interest income 2,332 3,424 5,756
Islamic banking income 950 388 1,338
Non-interest income 1,384 1,205 2,590

Total operating income 4,666 5,017 9,683

Total operating expense (1,849) (2,002) (3,851)

Operating profit 2,817 3,015 5,832

Loan impairment allowance (566) (545) (1,112)
Impairment write back/(loss) (23) - (23)
Associates & JVs (1) 1 0
Pretax profit 2,226 2,470 4,697
Taxation (557) (612) (1,169)
Minority interest (45) (11) (56)
Net profit 1,625 1,847 3,472 113.6%

Share capital (m) 3,014 5,941

EPS (sen) 53.9 58.4 8.4%
Source: Maybank IB
* Note: Forecast for RHB Capital is apportioned to a March FYE.

…but likely initially dilutive on ROEs. We estimate an initial dilution

in AMMB’s FY13 ROAE from 13.3% to 10.2%. What we would
nevertheless expect is for there to be eventual cost savings. We
estimate that every 10% reduction in costs would result in a 1%-point
improvement to ROEs.

Impact on ROAEs (RM’m)

FY11 FY12 FY13
Proforma group net profit 3,106 3,472
Dividends (35% payout) (1,087) (1,215)
Retained profit 2,019 2,257

Shareholders funds 10,601

New share issue 20,389
Enlarged shareholders funds 30,990 33,009 35,266
Avg shareholders funds 32,000 34,137

Current ROAE 13.0% 13.3%

Proforma ROAE 9.7% 10.2%

Source: Maybank IB

4 April 2011 Page 6 of 9

 RHB-AMMB

Valuations would be decent

Compensation through lower P/BV. At our assumed share exchange

price of RM6.97 for AMMB, the enlarged AMMB group would trade at a
prospective FY13 PE of 11.9x and P/BV of 1.2x which we think is fair,
to compensate for the lower ROAE of 10.2%.

Valuations on proforma FYE3/13

Current Proforma
EPS (sen) 53.9 58.4
BVPS (RM) 4.26 5.94
ROAE 13.3% 10.2%

Share price (RM): 6.97

PE (x) 12.9 11.9
P/BV (x) 1.6 1.2
Source: Companies, Maybank IB

Are there areas of synergy?

3rd largest financial institution… The merger would create the third
largest financial institution in the country in terms of asset size, just a
tad ahead of Public Bank. It would, nevertheless, lag Public Bank in
terms of the size of its loan and customer deposits portfolio, as well as
earnings.

Size comparison (RM'm) – end-Dec 2010

Net profit (2012
Assets Net loans Cust deps calendarized)

Maybank 357,623 219,420 248,138 5,205

CIMB 269,365 159,181 199,846 4,685

AMMB-RHBC 234,296 149,175 165,123 3,380

Public Bk 226,329 153,983 176,872 3,830

RHB Cap 129,325 81,228 94,434 1,798

AMMB 104,970 67,947 70,689 1,582

Source: Companies, Maybank IB

A more balanced loan portfolio. Size aside, one of the areas that
would yield synergies, in our opinion, is in an improved clientele mix
and the creation of a more balanced loan portfolio. Firstly, RHB
Capital’s higher percentage of loans to government bodies and SMEs
would help reduce the enlarged AMMB’s individual loan exposure to
51% from 61%. It would also create a more favorable mix of variable to
fixed rate loans of 60:40 versus 49:51 presently.

4 April 2011 Page 7 of 9

 RHB-AMMB

Loan segmental analysis

RHBC AMMB Combined
Domestic non-bank financial insts 0.4% 0.5% 0.4%
Domestic business entities 0.0% 0.0% 0.0%
- SMEs 13.2% 10.9% 12.2%
- others 26.4% 26.5% 26.5%
Government and stat bodies 11.0% 0.4% 6.3%
Individuals 43.6% 61.0% 51.3%
Other domestic entities 0.0% 0.0% 0.0%
Foreign entities 5.4% 0.8% 3.4%
Gross loans & advances 100.0% 100.0% 100.0%

Fixed rate: 31.9% 50.7% 40.5%

- housing loans 1.8% 2.8% 2.3%
- HP 13.1% 33.8% 22.5%
- Others 17.0% 14.1% 15.7%
Variable rate: 68.1% 49.3% 59.5%
- BLR 39.1% 27.7% 33.9%
- Cost plus 23.8% 19.2% 21.7%
- Other variable rates 5.2% 2.4% 3.9%
Gross loans & advances 100.0% 100.0% 100.0%
Source: Companies, Maybank IB

Enhanced contributions from Islamic banking. Income from RHB

Capital’s Islamic banking operations are currently about 40% that of
AMMB’s. On a merged basis, combined Islamic banking income would
be the third largest in the industry, while in terms of size, the entity
would come in a close second to CIMB Islamic Bank.

Islamic banks – total assets and financing & advances

Total assets Financing & advances
Maybank Islamic 48,292 37,910
CIMB Islamic Bank 39,075 23,369
AMMB-RHB Islamic 31,134 21,397
Public Islamic Bank 23,661 16,340
AmIslamic Bank 18,025 12,683
RHB Islamic Bank 13,109 8,714
Source: Companies, Maybank IB

Insurance for AMMB, treasury for RHB Capital. AMMB would bring
to the table its insurance division, that has seen strong contributions
from both life and general, leveraging off its partnership with Friends
Provident and Australia Group respectively. RHB Capital, meanwhile,
would complement in terms of its treasury operations, which have been
a substantial contribution to group earnings. RHB Capital’s overseas
operations are not sizeable, but still larger than AMMB’s at this stage,
with branches/representative offices in Singapore, Vietnam, Thailand,
Brunei – the acquisition of PT Bank Mestika Dharma remains pending.

Pretax profit breakdown based on latest results

RHB Cap AMMB
2010 % of total 9MFYE3/11 % of total
Corporate & investment bkg 615 32% 321 22%
Retail banking 787 41% 600 42%
Business banking 310 16% 199 14%
Treasury & money markets 664 35% 201 14%
Islamic banking 89 5% - 0%
Insurance - 0% 127 9%
International banking 100 5% - 0%
Others (666) -35% (9) -1%
Total pretax profit 1,899 100% 1,440 100%
Source: Companies, Maybank IB

4 April 2011 Page 8 of 9

 RHB-AMMB

Definition of Ratings
Maybank Investment Bank Research uses the following rating system:
BUY Total return is expected to be above 10% in the next 12 months
HOLD Total return is expected to be between -5% to 10% in the next 12 months
SELL Total return is expected to be below -5% in the next 12 months

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investm ent ratings are
only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not
carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings
BV = Book Value FV = Fair Value PEG = PE Ratio To Growth
CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio
Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter
CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset
DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity
DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds
EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital
EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year
EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date
EV = Enterprise Value PBT = Profit Before Tax

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ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on
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4 April 2011 Page 9 of 9