AMMB Holdings - Expanding Credit Card Business

THE BUZZ

AMMB announced that it has entered into a conditional share sale agreement with MBF Holdings Berhad and its wholly-owned subsidiaries Atox Cards SB and Jastura SB, for the proposed acquisition of an aggregate 100% equity interest in MBF Cards (M) SB for a total cash purchase consideration of RM623.4m, to be funded via internally generated cash and borrowings.

OUR TAKE

A tad expensive, but banking on the synergies. The acquisition sum of RM623.4m - which equates to a relatively expensive PBV of 2.9x - will result in goodwill of RM411.1m. At first glance, the acquisition looks relatively pricey, with the ROE of 23% being largely in line with the industry’s credit card average profitability metrics but at a premium valuation to the industry. However, we believe that this acquisition makes commercial sense and may give rise to synergies compared with the group’s proposed acquisition of Kurnia Asia earlier. Note that the acquisition price includes a 33.3% equity stake in Bonuskad Loyalty SB, which may create cross-selling opportunities. The acquisition is expected to increase AMMB’s credit card receivable base from RM1.7bn to RM2.3bn (top 6 in Malaysia) and merchants-in-force from 10,000 to 45,000 (top 3 in Malaysia). We estimate a marginal 40bps impact on the group’s Tier 1 core equity capital ratio arising from the goodwill, which the group can well absorb without needing to initiate an equity cash call.

More on the synergies. As the customer profile of MBF Cards (67%) comprises middle to higher income customers, there are opportunities to enhance cross-selling of the group’s huge portfolio of banking products. More importantly, MBF Cards has one of the largest merchant acquiring businesses in Malaysia with a staggering 33,000 merchants nationwide, which will give rise to immense cross selling opportunities that will spur CASA growth and other SME business banking channels which MBF was previously unable to access on a standalone basis. The acquisition will create a top 3 card merchant business with over 45,000 merchants on board. Other synergies may include tapping the lower funding cost of AMMB’s bank-backed balance sheet and opportunities to cross-sell to Bonus Link’s 7m customers.

Acquisition is broadly in line with group’s goals. We view the acquisition to be broadly in line with the group’s goals of: 1) accelerating its non-interest income growth, 2) increase its current sub-par CASA profile by tapping on cross selling opportunities of MBF’s wide merchant base, 3) raising cross selling opportunities to drive high retail fee incomes via the likes of various wealth management revenue growth sources.

Looking at the longer term.  Despite the apparent longer term synergies, we would like to point out that the immediate earnings contribution would be marginal as we estimate it at 1.7%, assuming that the acquisition is equally funded via debts and internal generated cash.

Maintain NEUTRAL. Pending more details on the funding structure of the acquisition and given the relatively immaterial immediate impact on earnings, we are maintaining our fair value at RM7.07, which implies a FY13 P/BV of 1.68x (ROE: 14.1%, Growth: 4%, COE: 10%). Maintain NEUTRAL.

More on MBF Cards

• First in the world to offer the Visa Wave card – an intelligent smart card equipped with the EMV chip – allowing it to be used as a swipe, wave, slot and even ATM card
• Largest non-bank backed credit card company in Malaysia

• First mono-line and non-bank in the entire ASEAN region to be awarded a Visa licence.
• It is also the only credit card in Malaysia to offer rewards through Malaysia’s biggest reward program, BonusLink - a multi-party rewards program that allows members to earn points when they shop
• Approximately 500,000 customers, with approximately 295,000 cards in circulation (CIC),

• 889 staff with an extensive network of 36,000 merchants and a nationwide network of 28 branches, including in Sabah and Sarawak.

• Well capitalized, with a RWCR of 31% providing scope for capital optimization and growth

• Gross impaired loans ratio marginally below the industry’s 1.7% level for credit cards.

Source: OSK