RHB Capital - Making sense of a possible MBSB merger BUY

- We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with an unchanged fair value of RM8.50/share. This is pegged to a fair P/BV of 1.45x based on an ROE of 12.9% FY12F.

- In this report, we outline the impact from RHB Cap possibly considering taking over Malaysia Building Society Bhd (MBSB). We have walked through several scenarios in which RHB Cap may fund for the acquisition either entirely through cash, or shares, or a combination of both (80% cash and 20% new shares). Assuming an acquisition price for MBSB at RM2.80/share, we find that the most optimal structure will likely be a funding combination of cash and shares. This leads to RHB Cap’s fair value rising to RM10.10/share from our current estimated RM8.50/share.

- The merger with MBSB, if it happens, will open up one of the most lucrative segments of lending, given MBSB’s exposure to the government civil servants’ personal financing segment.  

- As a gauge, Bank Rakyat’s personal loan size is about RM65bil (or 77% of its total loan book), while MBSB’s is RM11bil. Bank Rakyat reported net earnings of RM2bil, while MBSB’s was RM325mil, in FY11. 

- In fact, a simplistic comparison between RHB Cap and Bank Rakyat indicates that the latter’s gross loans of RM84bil is slightly less than RHB Cap’s RM97bil, but Bank Rakyat’s net earnings of RM2bil has already exceeded RHB Cap’s RM1.5bil, in FY11. 

- We do not foresee any major gaps in terms of possible capital or SRR requirements. For RHB Cap, the next possible acquisition may be Bank Mestika first, before MBSB. However, we estimate that a possible acquisition of Bank Mestika would be neutral to RHB Cap with fair value being revised to RM8.40/share, from RM8.50/share currently. 

- So in a nutshell, we do not expect any further downside to RHB Cap. A merger with MBSB merger will likely be positive, given that this opens up a new and more profitable segment of lending for RHB Cap. A possible hindrance may be the perception that RHB Cap is allowed into this segment, while other commercial banks would not be able to tap into this, but we believe  this would be easily countered by the fact that the major shareholder of both RHB Cap and MBSB is the Employees Provident Fund, which represents the bulk of the retirement funds of the workforce in Malaysia. Thus, in essence, the public’s interests is best aligned to both RHB Cap, and MBSB. 

Source: AmeSecurities