Hong Leong Bank - To acquire PBB? Unlikely it would appear HOLD

- We are maintaining our rating on Hong Leong Bank Bhd (HLBB) at HOLD, with an unchanged fair value of RM15.30/share. Our fair value is based on a revised FY13F ROE of 15.1% with fair P/BV at 2.2x.

- We believe there has been recent speculation of HLBB taking over Public Bank (PBB), given the recent run-up in both banks’ share prices. 

- Based on our checks, both companies have confirmed that this is unlikely. 

- Nevertheless, we have done a sensitivity analysis to gauge the impact, if any, on HLBB, if this were to happen. 

- Assuming HLBB were to acquire PBB through the issue of new shares, we estimate that the fair value for HLBB would decline to RM13.00/share. Assuming funding was done through a rights issue, our fair value would be lowered to RM11.39/share.

- More importantly, HLFG’s investment in HLBB is devalued, to only RM15bil, based on a fair value of RM13.00/share assuming a new share issuance. We estimate the current value of RM17.7bil, if based on our current forecast fair value of RM15.30/share for HLBB without any merger.  

- In terms of asset size, we estimate that the merged entity will be ranked second. 

- What may make it compelling would be its domestic market ranking position in terms of core retail segments. We estimate that the merged entity’s market share of domestic loans will increase substantially to 25% from HLBB’s current 9% and PBB’s 16%, beating Maybank, which is now currently the largest with an estimated market share of 17%. 

- Market share for core retail segments will be at the top, with mortgage at 29% (HLBB: 11%, PBB: 18%, Maybank:13%), non-residential mortgage segment at 42% (HLBB: 9%, PBB: 33%, Maybank: 6%), and auto at 31% (HLBB: 12%, PBB: 19%, Maybank: 18%).  Market share of domestic deposits will also be the largest at 25%. 

- The other positive would be that HLBB’s book value will almost double, to RM13.40/share (under funding through share issuance scenario) or RM11.70/share (under scenario of rights issue), from our current forecast of RM7.13/share. Thus, we believe that P/BV is unlikely to fall to below 1x given the compelling market share data, which means that there is limited downside to HLBB’s share price if the M&A happens. Otherwise, we would see a massive dilution in our ROE estimates based on our sensitivity analysis, and thus, consequently a potential downgrade in HLBB’s fair value, if the M&A happens.

Source: AmeSecurities