Proposed merger plan credit positive for AmBank, but less for RHB

PETALING JAYA: Moody’s Investors Service said the proposed merger is credit positive for AmBank Group’s main operating bank AmBank (M) Bhd as its distribution, funding resources and systemic importance would benefit from being part of a larger banking group.

However, the rating agency said the potential benefits to RHB Bank are discounted by its likely operating challenges to rationalise the organisation structure and infrastructure of the newly merged entity. Its revenue benefits will likely materialise only after the merged entity incurs substantial restructuring expenses.

On June 1, RHB and AMMB announced that they have commenced a 90-day exclusivity agreement to discuss an all-share merger exercise pending regulatory approval.

The combination of the two midsized financial institutions would create Malaysia’s fourth-largest financial group by assets, with total consolidated assets of RM368 billion based on March 2017 financials.

On a standalone credit basis, Moody’s said 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,” it explained.

Moody’s expects 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.

Even as Malaysia’s fourth-largest financial group, the ratings agency does not expect the merged entity to be in a significantly stronger strategic position relative to the top three Malaysian banking groups.

“Malayan Banking Bhd and CIMB Bank Bhd have entrenched corporate relationships, while Public Bank Bhd has a long-standing leadership position in retail lending,” it said.

However, Moody’s said 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 1.6 times, and AmBank Group’s assets by 2.7 times, based on March 31, 2017 figures.

Moody’s said 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.

Meanwhile, the research house noted that the merger will not significantly affect the two entities’ asset profile and capitalisation.

Based on its pro forma estimates, the gross impaired loan ratio of the merged entity was 2.2% as at March 2017 compared with 2.4% for RHB and 1.9% for AmBank Group.

On capital, Moody’s said it does not expect the proposed all-share transaction to result in significant goodwill that would negatively affect the capital position of the merged entity. As at end-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.