RHB-AmBank proposed merger favours the latter

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Last Thursday (June 1), RHB Bank Berhad and AMMB Holdings Berhad (AmBank) announced their 90-day exclusivity agreement to discuss a merger, pending regulatory approval. The banks indicated that the transaction would effectively be an all-share merger.

The combination of the two midsize financial institutions would create Malaysia’s fourth-largest financial group by assets, with total consolidated assets of MYR368 billion ($86 billion), based on March 2017 financials.

The proposed merger is credit positive for AmBank (M) Berhad (Baa1/Baa1 stable, baa3), AmBank Group’s main operating bank, because its distribution, funding resources and systemic importance would benefit from being part of a larger Malaysian banking group.

On a standalone credit basis, AmBank’s funding profile is weaker than that of RHB. AmBank has a materially smaller market share of domestic deposits and lower percentage of low-cost current and savings account deposits in its deposit mix than RHB.

We expect the merged entity’s funding profile to be closer to that of RHB, and to gain from the larger scale of their combined and enhanced branch and customer network.

Potential benefits to RHB are discounted by its likely operating challenges to rationalise the organization structure and infrastructure of the newly merged entity.

RHB’s integration of OSK Investment Bank Group (unrated) and other mergers involving Malaysian banks suggest significant challenges, with the realization of revenue and cost synergies occurring many years after integration. In this case, revenue benefits will likely materialize only after the merged entity incurs substantial restructuring expenses.

Furthermore, even as Malaysia’s fourth-largest financial group, we do not expect the merged entity to be in a significantly stronger strategic position relative to the top three Malaysian banking groups.

Malayan Banking Berhad (Maybank, A3/A3 stable, a3) and CIMB Bank Berhad (A3/A3 stable, baa2) have entrenched corporate relationships, while Public Bank Berhad (A3 stable, a3) has a longstanding leadership position in retail lending.

However, the merger would still enhance the scale of RHB’s operations in Malaysia, and give it access to customer and product segments with which AmBank Group has stronger ties, such as the higher-yielding auto-finance segment, investment banking and general insurance.

The combined total assets of both AmBank Group and RHB would increase RHB’s assets by 1.6x, and AmBank Group’s assets by 2.7x, based on 31 March 2017 figures.

The merged entity would solidify its position as having among the largest branch networks in Malaysia, close to that of Maybank, which remains the country’s largest banking group in terms of banking assets, loans and deposits.

The merger will not significantly affect the two entities’ asset profile and capitalization. Based on our pro forma estimates, the gross impaired loan ratio of the merged entity was 2.2%, based on March 2017 financials, compared with 2.4% for RHB and 1.9% for AmBank Group.

On capital, we do not expect the proposed all-share transaction to result in significant goodwill that would negatively affect the capital position of the merged entity.

At the end of March 2017, RHB reported a common equity Tier 1 ratio of 13.2%, while AmBank reported a ratio 11.6% for the consolidated AmBank Group.

** The article is courtesy of Moody’s Credit Outlook report as of June 8, 2017. For any credit ratings referenced in this article, and for the most updated credit rating action information and rating history, please visit www.moodys.com.

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