KUCHING: For the highly anticipated merger between RHB Bank Bhd (RHB) and AMMB Holdings Bhd (AmBank) to be successful and profitable, its integration road map will need to prioritise cost-cutting.
To recap, nearly two months ago, Bank Negara Malaysia (BNM) granted their approval for RHB and AmBank to commence discussions for their proposed mergers.
The approval stipulated that they would need to enter into an exclusivity agreement to negotiate and finalise terms and conditions of the proposed merger by the end of August.
Since then, other than expectations that its will be an all-shares merger, no further details have been announced, leaving industry analysts to speculate on what to expect as the merger deadline approaches.
In a recent banking sector update from the research arm of Macquarie Group Ltd (Macquarie Research), the research arm shared that their estimates indicated that the combined cost-income ratio (CIR) of the two banks is an estimated 53 per cent – higher than the 50 per cent sector average.
“As such, the integration roadmap for RHB-AmBank merger should prioritise cost-cutting as the most immediate path to boosting profitability, with tapping revenue synergies to follow,” opined the research arm.
The report then went on to suggest that a combination of staff and branch reductions yielding 10 per cent of total operating cost savings would further reduce RHB-AmBank’s estimated CIR to 48 per cent while boosting Return on Equity to 9.8 per cent from the current estimated 8.7 per cent.
However, even with cost cutting measures in place, the research forewarns that asset quality volatility and peer-lagging loan loss cover (LLC) at both banks will mean that credit cost moderations will take time to crystallise.
“But the impending ‘Malaysian Financial Reporting Standard 9 Financial Instruments: Recognition and Measurement’ implementation should result in more robust LLC ratios, with combined common equity tier 1 ratio expected to remain in a peer-comparable 11 to 12 per cent range,” added the research arm.
On the whole, Macquarie Research is optimistic of the merger as there is substantial synergy potential in their operating incomes due to the two bank having a similar strategy in their reloan growth, with a rebalancing away from the lower-margin and high credit cost corporate lending in favour of mortgages and SMEs, and priority in reversing low current account saving account (CASA) ratios.
“Diversified non-interest income bases have favourably large potential for complementation and scale synergies in segments like investment banking (IB), fund management and general insurance, with the latter two to be market leaders (RHB-AmBank) when combined,” explained the research arm.
Meanwhile, there has been no further guidance of who new management will be for the combined entity.
Macquarie Research however, opines that combined teams from both banks would offer a good mix of experience and maturity to be able to executive the merger integration without the need for outside hires.
All things considered, Macquarie Research is remaining ‘overweight’ on the Malaysian banking sector as local bank earnings and valuation recovery is still underscored by improving net interest margins, recovering capital markets and moderating asset quality stress and pruned operating costs.
And with the potential consolidation of the sector with the RHB-AmBank merger, these fundamentals are expected to strengthen further.