Tuesday, December 22, 2009
My Prediction For The #1 Biz News In 2010 - CIMB Merges With Public Bank
OK, remember you heard it first here, here during the last few days of 2009. So when it pans out, remember me ok ... We still have ten banks in Malaysia, and that is still way too many banks, we should really just have 5, probably we will end up with 7. The markets are buzzed with Hong Leong Bank thinking of snatching EON Bank and/or Affin Bank. Well, the latter two should not be around by end of 2010, and that's pretty much a given. So called anchor banks that have no capacity or resources to be competitive in an open environment will have to sell.
(click on image to enlarge for viewing)
My best prediction and also the biggest shebang for 2010 is that CIMB Bank will merge with Public Bank. If you read the roadmaps closely and do the usual deduction analysis, its very likely going to happen. It makes sense on so many levels. Maybe Goldman Sachs should hire me to close this deal with these two banks (send me an email: email@example.com).
A couple of months ago, there were rumours that the two Chinese banks, namely Public Bank and Hong Leong Bank, were going to merge. It is unlikely to pan out as Public Bank is "too important" an asset, coupled with a possibility that there could be regulatory or political resistance, and that there appears to be a more viable case to go with CIMB. I see the main hurdle to a Public Bank-Hong Leong Bank merger being that Bank Negara would never want the biggest bank (by virtue of the merger) to be controlled by ONE individual. Apparently Hong Leong Bank has also been not so willing to go higher on the pricing front. The replication of businesses are too great as well.
Why CIMB & Public?
1) Fit - It fits into each other's strengths. One is in investment banking and has very decent regional exposure while Public is very commanding in consumer banking. Very good loan-deposit fit.
2) Flagship Entity & Size - The two merged would actually see CIMB-Public becoming possibly the biggest banking group in Southeast Asia, possibly nudging aside DBS Banking Group as well. The importance of size cannot be discounted. The forward thinking Nazir with Khazanah and EPF backing it all the way should see this as a necessary strategic consolidation. Get our best two banks to go and conquer the region. When you have a brood of kids and you are not very rich, pick the smartest kid or the one you like best and that one gets to go to college - CIMB Bank should be the "flagship entity" to plant the country's flag in the region.
3) Teh's Stake - Teh of Public Bank has no seeming successor from his family to take over the shares. When he is no longer around, the controlling stake may be viewed as a negative rather than as a positive. If no family member is keen to follow up, its better to NOT just be a strategic silent shareholder - eventually they may be "guided" to dispose the shares one way or another - why not lay down the strategic future of Public Bank in "safer hands". Its a sure way of protecting and maintaining Teh's legacy in the banking industry.
4) Asset Management - One of the main jewels of Public Bank is Public Mutual, something CIMB has been trying very hard to build/buy with minimal success. Imagine transplanting the Public Mutual exemplary record across the region. This can be turned into a massive fee generating machinery via its regional branches.
5) Public Bank's Capital Constraints - This is something which is not discussed often enough by Public Bank's shareholders. In recent years, tons of money has been paid out in dividends, but of late that has be constrained as PB needs to bolster up its capital adequacy ratio despite being a highly profitable entity. I doubt very much that Teh wants to do a rights issue. Public Bank's Tier 1 capital is at a precarious 8.6% and it needs to meet global standards soon. The Basel Committee is expected to announce several measures to strengthen banking regulations by end 2009. These include (a) raising the quality, consistency and transparency of Tier 1 capital base (with the predominant form to be common shares and retained earnings), (b) introducing a leverage ratio as a supplementary measure to the Basel II framework and (c) implementing a framework for countercyclical capital buffers above the minimum requirement, including constraints on capital distributions. If adopted by Bank Negara, and I don't see why not, Malaysian banks will have less room to raise Tier 1 debt securities and pay generous dividends, resulting in lower ROEs in the longer term. This is what Public Bank is facing as a hurdle for the future.
6) Staff Retention & Culture - I think there is a much better fit with CIMB than with Hong Leong Bank. CIMB pays much better for performers and critical functions, and I sense a possibly higher approval rating by Public Bank's staff if the merger was with CIMB than with any other bank.
7) Playing Devil's Advocate - Can Public Bank go it alone without Teh at the helm in the future? Yes, but that is not the question at hand. The main question is the floating controlling stake. Let's take another tack and imagine a Public-AMMB vehicle, I can see issues with who controls what and the culture is definitely very different. The same goes for Public-RHB but to a lesser extent. One can see that both versions would yield minimal synergies. When you consider CIMB-Public, it crystallises as a beautiful plot, Public's side continues to dominate the consumer banking, throw the asset management stuff (Principal) into Public Mutual, consolidate Public Bank's overseas holdings under CIMB's regional management, leverage on the better loan-deposit ratio for much better margins in various products., etc...
8) Ownership Streamlined - A merger between the two is much easily digestible and acceptable as it won't be controlled by an individual. The merged entity would see Khazanah and EPF being up there as the main shareholders. There would be an even better free float and liquidity and the merged entity would surely rank as one of the more important Asian banking groups by international funds and institutions.
CIMB vs Public Bank (F) Comparisons
a) Tier 1 Capital 12.1% vs 8.6%
b) CY2010F PER 14.1x vs 13.3x
c) PB Value (2010) 2.1x vs 3.2x
Why Now? Why Not In 2009, 2008 or 2011?
Well, we can rule out 2008 owing to the global crisis. In 2009, you cannot really do the deal properly in CIMB's viewpoint because the valuations of CIMB was too low to make it work.
CIMB 3.57bn shares / RM45.8bn
Public Bank 3.53bn shares / RM38.6bn
One would have noted that CIMB outperformed the banks over the last 12 months by a wide margin. Just look at the market cap comparison now. It would have looked very different at the beginning of the year. How can I say something, without having to say it quite so plain and in the face?!!
HowTo Do It?
Back to Hong Leong Bank, it would have been a smaller bank trying to take over a much larger entity. To maintain control, Quek would have had to put in loads of cash to do the deal. In CIMB-Public scenario, you should just do a share swap. A one for one swap would anger CIMB minority shareholders. However, the key is to assuage the Public Bank minority shareholders, hence they deserve some sort of premium. I would propose a 1,000 Public Bank in exchange for 900 CIMB shares deal. That would still be a good premium, and CIMB shareholders would be very pleased to have the strongest consumer bank into their fold. That way, post merger CIMB shares would probably go even higher, thus placating those Public Bank shareholders who have switched to CIMB shares.
Key Issue: The biggest obstacle is not getting enough Public Bank shareholders to agree to do the swap. I have two additional measures to ensure that the PB shareholders will go through with the swap, but that will only need to be revealed if someone hires me to consult.
Valuation wise, CIMB's price-book ratio has increased rapidly over the past 18 months, but it will never be able to match Public Bank's prohibitive 3.2x PB ratio. Everybody should acknowledge that Public Bank deserves the premium from its better metrics in consumer banking, so a 10 for 9 share swap, though seemingly favouring Public Bank shareholders, would have to be the way to proceed to secure the deal.
The new entity would have 6.747bn shares, and assuming the new entity's share price at RM13.00 = RM87.7bn market cap. DBS Group has a market cap of $24.4bn = RM83bn ~ with that kind of boasting rights, you just HAD to do the deal!!!
Khazanah with 27.86% in CIMB earlier, would now have 14.74% in the new entity. EPF with 16.04% in CIMB and 12.8% in Public Bank, would now have 14.52% in the new entity.It would not surprise me if both Khazanah and EPF were to keep buying Public Bank shares in the open market "during the deal" as that would really help facilitate the deal further.
Recent historical banking M&A - Acquirer & Acquiree PBV (x)
Mar‐07 ANZ & AMMB 1.8
Apr‐07 Bank of Tokyo‐Mitsubishi UFJ & BCHB 2.7
Nov‐07 Bank of East Asia & Affin 1.0
Feb‐08 Primus Partners & EON Cap 2.1
May‐08 Abu Dhabi Commercial Bank & RHB Cap 2.2
p/s photo: Sharon Xu