CIMB Group - Investment banking platform enhanced with RBS deal BUY

-  We are maintaining BUY on CIMB Group Holdings Bhd (CIMB), with an unchanged fair value of RM8.00/share, based on an ROE of 14.9% FY12F and fair P/BV of 2.1x.

-  CIMB has announced it entered into a Sale and Purchase Agreement with Royal Bank of Scotland (RBS) on 2 April 2012 for the acquisition of selected cash equities business in eight markets. These comprise Australia, China, Hong Kong, India and Taiwan, equity capital markets business and M&A corporate finance business in Australia, China (excluding any activities carried on by Hua Ying Securities Co., Ltd), Hong Kong, India, Indonesia, Malaysia, Singapore, Taiwan and Thailand.

-  Total consideration is GBP173.9mil or USD279.2mil. This seems to be higher than earlier press reports of around USD50mil. However, the acquisition now involves a larger number of markets. The acquisition is at a P/NTA of 0.98x while we estimate the acquisition P/BV is cheap at 0.92x. In addition, the GPB173.9mil total consideration included cash and receivables equivalent of GBP113.mil.

-  CIMB’s rationale is to significantly scale up its investment banking presence in Asia Pacific. The addition of the RBS units will mean that CIMB will have new on-shore presence in Taiwan and Australia, as well substantially enlarged operations in Hong Kong, India and China. We believe the deal will allow it to take a major leap forward to position itself as a leading AsiaPacific investment bank if the merger is executed well.

-  We also view this as a good opportunity for CIMB to secure a large pool of talent, in that with this acquisition, it will be effectively acquiring 400 new investment banking staff from RBS. Thus, the other way to look at the acquisition would be in terms of acquisition cost per employee. We estimate the acquisition price implies an equivalent sign-up fee of USD244,066/staff, assuming a total of 400 staff from RBS will be retained. We believe this can be justified with enhanced revenue from the merged operations later. 

-  The RBS acquisition is neutral in terms of net impact to our forecasts, thus in financial terms, the deal is not sufficient to rerate CIMB significantly. However, we think that acquisition valuation is cheap and allows CIMB to scale up its investment banking operations significantly. On a group basis overall, CIMB has earlier indicated an ROE target of 16.4% for FY12F. We have a forecast of 14.9%. CIMB’s share price has moved up from recent lows at around RM7.00 over the past six months. Rerating catalysts ahead ahead are:- (a) ability to achieve its ROE guidance for FY12F; (b) better-thanexpected non-interest income; (c) better-than-expected credit costs and NPLs. 

Source: AmeSecurities