Business

Wednesday September 17, 2008 MYT 10:16:14 AM

Maybank’s potential trading loss from BII capped


KUALA LUMPUR: Indonesian regulator Bapepam’s decision to relax the new sell-down ruling over Maybank’s acquisition of PT Bank Internasional Indonesia (BII) has come as a positive surprise to analysts and the market.

CIMB Equities Research said on Wednesday the relaxation of the rule would limit the potential loss for Maybank.

In a research note, it said it had rated high the likelihood of the deal being called off after Maybank announced on Monday that Bapepam had rejected its request to relax of the new ruling.

However, it was not surprised that Bank Negara reinstated its approval as the flexibility in the timing of the selldown of BII would limit the potential trading loss for Maybank, which had been the central bank’s main concern.

“These developments pave the way for Maybank to complete the deal and achieve a quantum leap in Indonesia.

"We reiterate our positive stance on the acquisition as we envisage stronger growth momentum for the financial market in Indonesia, which has a huge population of 224.8 million and an under-penetrated market,” it said.

CIMB Research said Indonesia had one of the lowest loan-to-GDP ratios of only 24% versus 102% in Malaysia, 100% for Singapore and 75% for Thailand.

The net interest margin in Indonesia was one of the highest in the region at 5.8% compared with only 2.3% for Malaysia.

“The relaxation of the rule will limit the potential loss for Maybank to 10% of its total investment in BII or up to RM860mil compared with the astronomical RM3.2bil estimated earlier.

“The RM3.2bil loss estimate, which represents a 37.2% loss on its total investment, is based on the assumption that Maybank would only be able to sell 20% of BII at 320 rupiah a share compared with its cost of 510 rupiah a share and includes RM2.56bil goodwill write-down,” it said.

The research house said furthermore, there should be a write-back of 4QFY6/08’s RM483.8mil provision for the BII deposit when the acquisition was completed.

“Nevertheless, potential losses from its BII investment spell downside risk to Maybank’s earnings over the next few years,” it said.

CIMB Research said the BII acquisition would dilute Maybank’s FY09 earnings by less than 5% but should be earnings accretive from FY10 onwards.

It added that it would factor in contributions from BII upon completion of the deal. However, for now, it retained its earnings forecasts and target price of RM8.60, still pegged to a 20% discount to the dividend discount model (DDM) valuation.

The key DDM parameters included a cost of equity of 11.3% and dividend growth rates of 7.3% for the interim phase and 6% for the long-term growth phase.

“We stick to our positive but contrarian view of the BII acquisition, which will help to support Maybank’s long-term growth prospects.

"However, the market is likely to react negatively to this turn of events given the concerns over the high valuation and capital commitment for the BII deal,” it said.

The research house said while it was pleased that the deal would go ahead, the flip-flops in the past two months underscore the high policy risks of operating in Indonesia.

“Furthermore, the potential BII loss may be an earnings overhang in the next few years,” it added.

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