Business





Saturday May 10, 2008

Maybank’s multibillion deal to acquire a bank in Pakistan draws mixed response

By TEE LIN SAY


THE country's largest bank Malayan Banking Bhd (Maybank), no doubt, has embarked on an aggressive regional shopping spree.

First, it was the acquisition of a 15% stake in Vietnam's An Binh Commercial Joint Stock Bank (ABBank) for RM430mil in March. Barely few weeks later, it announced that it was buying Bank Internasional Indonesia (BII) for RM8.6bil or at 4.65 times (x) price to book value, making it the biggest mergers and acquisition exercise for the banking industry.

More recently, Maybank revealed details of a generally perceived-to-be pricey acquisition, this time in the booming and under penetrated market of Pakistan. It announced that it was buying a 15% stake in MCB Bank Ltd, the fourth largest bank in Pakistan, for US$686mil (RM2.17bil) from the Nishat Group.

Furthermore, Maybank has the option to pay up to US$247mil (RM780mil) if it decides to raise another five per cent in its stake in a year's time.

This transaction values the acquisition of MCB Bank at 5.13x book value. At the agreed price of 470 Pakistan rupees, this is also a 28.47% premium over its share price of 365.85 rupees on Thursday.

Not surprisingly, there are murmurs that the purchase is relatively expensive as recent banking transactions in Pakistan have ranged between 3.47 and 4.1x book value. Even so, the price tag is lower than the 5.47x book value that Standard Chartered paid for 95.4% of Union Bank in July 2006 when the banking sector in Pakistan first opened its doors to foreign investors.

Investor disapproval was evident when Maybank resumed trading on Tuesday. The shares were sold down 30 sen lower to end the day at RM7.70.

A Good Deal

From an economic angle, Pakistan, on the onset, paints an optimistic picture. The country has a population of 163 million – six times that of Malaysia – and its US$164bil (RM518bil) economy is estimated to grow 6.5% this year. The country also has promising potential in the Islamic banking segment – a factor that is quite clearly one of the main attractions for Maybank.

MCB Bank is the most profitable lender in Pakistan with a return on average equity of 38%. Its net interest margin of 8.08% is also the highest in Pakistan, and much higher compared with that of Malaysian banks.

The bank's net profit has been growing at a compounded rate of 64.78% over the last four years. For its financial year ended December 2007, MCB generated 16.44 billion Pakistan rupees in net profit. (RM1= 20.44 rupees).

MCB Bank's 18.4% capital adequacy is considered robust, but the 4.7% non-performing loan ratio reflects the relatively high chance of bad debts in Pakistan.

As this involves an all-cash deal to be financed through a internal and external funds, Maybank will raise more money to restore its capital ratios.

Meet The Press

At his first press briefing as Maybank head honcho, Datuk Seri Abdul Wahid Omar asserted that Maybank wants to bring its tier-1 capital ratio back to around 7%-8% and aims for a total capital ratio of 11%-12%. The fund-raising plan will be announced by the end of next month.

Wahid says this acquisition will not affect Maybank's 60% dividend payout ratio for now, but may soon review its dividend policy.

The purchase of MCB will contribute to Maybank's profits immediately following its completion (next month). Based on its previous year's earnings, MCB will contribute five per cent to Maybank's pre-tax profit. Maybank will also appoint two directors to MCB Bank's board, and plans to equity-account the profits.

OSK Investment banking analyst Chan Ken Yew views Maybank's recent acquisitions positively as he says there is a definite a need for the bank to expand overseas.

He adds that Maybank's recent acquisitions are not financially burdensome as it has the capacity to rise up to RM13bil to RM14bil capital in the form of hybrid tier-1 and tier-2 debts.

“Undeniably, their acquisition of BII did not come cheap, and we expect some dilution as its return on equity (ROE) is lower than Maybank's ROE of approximately 17%.

“Over the longer term however, we expect to see some sort of geographical synergy with BII. ABBank is too small to be significant. We like MCB for its potential, plus its going to be earnings accretive immediately,” says Chan.

Another analyst from a foreign research house isn't too positive on Maybank's recent moves.

“I am not comfortable with the state of economics and politics in Pakistan. On top of that, it is paying 5.1x book value which is too expensive.”

She points out that there would have been less to gripe about if the purchase of BII had taken place a few years ago.

For the financial year ended December 2007, Maybank's revenue increased 13.2% to RM7.92bil while net profit improved 7.75% to RM1.47bil.

Mixed views

When contacted, views among analysts were pretty mixed on Maybank's venture into Pakistan.

Citi Research for instance, views this acquisition as expensive given imminent macroeconomic headwinds in Pakistan and a lack of immediate synergy between Maybank, BII and MCB. It is reducing its target price to account for a lower dividend payout of 50% from 55% earlier.

OSK’s Chan however opines that the acquisition price is not expensive, as the bank has outperformed its peers in various aspects.

“I think Maybank's main synergy will be its ability to tap into Pakistan's Islamic and consumer banking. Maybank is after all, Malaysia's largest Islamic banking institution,” he says.

He adds that Pakistan is also regarded as one of the fastest growing banking industry in the world due to its low banking penetration rate as per the loan-to-GDP ratio.

Kenanga Research’s research head Yeonzon Yeow says the acquisition is justifiably expensive, as MCB is the fourth largest bank by asset (US$6.7bil) and branch network (1,026 branches) and largest by market capitalisation (US$4.1bil).

“The bank is very profitable with sound risk management as demonstrated by its high net interest margins and return of assets and equities of 8.1% and 34% respectively with low non-performing loans of 4.7%,” says Yeow.

Chan feels that Maybank will be able to add value and enhance MCB’s market positioning through an improvement in product innovation and cross selling of a wider range of consumer and SME banking products and services.

“Long term earnings growth to Maybank is reinforced by the significantly higher average net interest banking margins in Pakistan of 6% versus Malaysia’s 2.3%.”

He says that Maybank’s larger and expanding regional network will also enhance cross border transactions mainly in regards to trade finances and remittance.

Yeow believes the focus of management will be on BII given the controlling stake that will be acquired. MCB and ABBank are at associate stake levels and level of involvement is mainly collaboration and knowledge transfer.

“We believe Maybank has sufficient resources to realise the value of its acquisitions in the medium term,” he says.

Hence, Yeow is maintaining his Buy call, but lowering his price target to RM10.10 using an FY08 price to book of 2.3x. This is a 15% premium to the average banking sector of 2x.

The dividend issue

During the media briefing, Wahid says that Maybank will announce its capital management plan in June this year. He hinted that this would include an equity capital raising plan.

Analysts are perhaps most concerned that management might reduce dividend payouts from its earlier guidance of 60%.

While OSK's Chan is calling a buy on Maybank, his target price of RM10.80 is under review as he too, has concerns of the dividend policy. This is because Wahid says that the long term dividend payout policy of 60% remains unchanged, but the actual dividend payout could vary depending on the new capital structure.

“This deviates from the message of the previous management that reaffirms their stance to maintain a dividend payout ratio of at least 60% or at least maintain its gross dividend per share,” says Chan.

Given the huge capital outlay of more than RM11bil for the Vietnam, Indonesia and Pakistan acquisitions, Citi sees downside risk to dividend payout.

Management's guidance that short-term payout may be lower than 60% confirms this. Citi thus reduces its payout ratio to 50% from 55%, resulting in a 9% reduction in its target price to RM7.60.

Looking at the bigger picture, Citi's Pakistan bank analyst Salman Ali expects rising inflation and monetary tightening to create downside risk to national economic growth and rising loan delinquencies.

While MCB has a strong deposit franchise, fully provided NPLs and the highest return on equity and return on asset among Pakistan banks, he views the stock as overvalued on both a price earnings and price to book basis.

Salman says that recent merger and acquisition price to book multiples for Pakistan banks range from 3.5x to 5.5x although these were considerably smaller-sized transactions. These transactions also took place when the Pakistan’s macro outlook was better.

“Banking sector NPL provisions rose from PRs138bil (Jan 5, 08) to PRs158bil (March 22, 08), illustrating the deteriorating quality of balance sheets. Loan growth in the first quarter was the strongest in the past six years, but is more working-capital related, including funding of deficits being created by high oil prices,” he says.

For MCB, Salman adds that performing loan growth has averaged 10% per annum for the last two years. Recent first quarter 2008 results justifies Citigroup’s concerns that net interest margins growth slowed to 12% and operating income to 7% in 2007.

  • E-mail this story
  • Print this story