Acquisition of Asian Finance Bank to create second largest Malaysian bank

Malaysian lender Malaysia Building Society Berhad (1171.KL) could soon become a full-fledged bank. The lender recently laid out plans to acquire Asian Financial Bank (AFB) in a deal that would result in the merged entity becoming Malaysia’s second largest Islamic bank by assets. After the merger, Malaysia Building Society would have an asset base of $10.5 billion (44 billion ringgit) and operate 46 branches.

Malaysia Building society will buy the stake held by foreign shareholders – Qatar Islamic Bank, Financial Assets Bahrain, RUSD Investment Bank and Tadhamon International Islamic Bank – for $153 million (645 million ringgit). The company recently stated that it would pay $94 million (397 million ringgit) in cash and the remaining $59 million through the issuance of 225.5 million shares at 1.10 ringgit per share. The proposed merger will be completed by the first quarter of 2018.

In a note to investors, officials from Malaysia Building Society Berhad said, “The merged entity is expected to leverage on the strength of MBSB’s business and the banking license held by AFB is anticipated to provide a unique opportunity for the merged entity to emerge as a full-fledged Islamic banking franchise in Malaysia.” In the last few years, the company has been trying hard to get a banking license that would give it access to cheaper sources of funding. Moody’s said this merger would be “credit positive” for Malaysia Building Society and would lower its funding costs, thereby widening margins. Further, it would also broaden its revenue streams as the merger would enable the company to offer a wider range of products and services through Asian Finance Bank’s banking license. However, this merger would intensify competition in the Malaysian banking sector.

ETFs offering exposure to Malaysian banks

Foreign investors seeking exposure in Malaysia’s banking sector could invest in country focused ETFs that offer diversification through investment in a single US security.

The most popular ETF for U.S. investors is the iShares MSCI Malaysia ETF (EWM). The iShares MSCI Malaysia ETF (EWM) invests in 43 of the most liquid companies in Malaysia.

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With assets under management of $448 million, the EWM ETF offers concentrated exposure to Malaysian companies. Financials is the top sector with 31% of assets, followed by utilities, industrials and telecommunication services with weightings of 14.8%, 14.5%, and 9.9% respectively. The ETF’s exposure to the financials sector has remained in the 30% to 32% range in the last five years. EWM’s top five holdings include 3 large banks – Public Bank, Malayan Bank, and CIMB Group Holdings. The fund is up 5.7% over the last one-year period, and year-to-date in 2017 it has gained 14.6%.

Largest banks in Malaysia

Year-to-date, the MSCI Malaysia Index has returned 5.9% while the Malaysian benchmark FTSE Bursa Malaysia KLCI Index has appreciated 6.2%. In comparison, the MSCI Malaysia Financials Index has soared 10.8%, outperforming broad based Malaysian stock market indices.

The largest Malaysian banks by assets are Malayan Bank, CIMB Group Holdings, Public Bank, RHB Bank and Hong Leong Financial. In 2016, these banks held assets worth $164 billion, $108 billion, $84.7 billion, $52.7 billion and $50.9 billion respectively.

Maybank

Malayan Banking Berhad, commonly known as Maybank is Malaysia’s largest bank by market cap as well as assets.

It is also among the largest banks in Southeast Asia with assets of $164 billion in 2016. The company has a current market cap of $23.5 billion. Maybank’s Islamic banking arm, Maybank Islamic, is currently ranked as the top Islamic bank in Asia Pacific and fifth in the world in terms of assets.

The company has a widespread international network spanning across all ASEAN countries. The bank currently has 2,400 branches in nearly 20 countries of the world and employs 45,000 employees.

In 2016, Maybank generated revenues of $7.6 billion and net interest margins of 1.9%.

Maybank‘s shares trade on the Kuala Lumpur Stock Exchange, Bursa Malaysia with ticker 1155.KL and on US OTC Markets with ticker MLYBY. The bank’s Kuala Lumpur listed shares have surged 20.7% in 2017.

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CIMB

CIMB Group Holdings is Malaysia’s second-largest bank by assets and third largest by market capitalization. The company has a current market cap of $13.5 billion. The company is one of the largest Islamic banks in the world and the largest Asia Pacific (ex-Japan) based investment bank. CIMB also has a wide presence in retail banking with 1,080 branches across the Asia Pacific region.

Currently, the group’s businesses are spread across 18 countries across the globe, primarily in the ASEAN region as well as global financial centers like New York, London and Hong Kong. The bank’s geographical reach is aided by strategic partnerships in various countries. Its largest partners include Principal Financial Group, Bank of Tokyo-Mitsubishi UFJ, Standard Bank and Daewoo Securities.

In 2016, CIMB group generated revenues of $6 billion and net interest margins of 2.5%, highest among its peers.

CIMB’s shares trade on Bursa Malaysia with the ticker 1023.KL and on US OTC Markets with the ticker CIMDF. The bank’s Kuala Lumpur listed shares have surged 40.8% in 2017 so far, and have outperformed its banking peers as well as the Malaysian benchmark KLCI Index.

Public Bank Berhad

Public Bank Berhad is Malaysia’s third-largest bank by assets and the second largest by market cap. The bank offers financial services across the Asia Pacific region. The company has a current market cap of $18.8 billion.

Public Bank is more focused on its retail banking business even though it offers a complete suite of services ranging from personal banking, commercial banking, Islamic banking, investment banking, share broking, trustee services, nominee services, sale and management of unit trust funds, and general insurance products.

In 2016, Public Bank Berhad generated revenues of $4.62 billion and net interest margins of 2.0%.

Public Bank’s shares trade on the Bursa Malaysia with ticker 1295.KL. The bank’s shares have surged 6.8% in 2017 so far, and have underperformed its banking peers.

RHB Bank Berhad

RHB Bank Berhad is Malaysia’s fourth-largest bank by assets and the fifth largest by market cap. RHB Bank was incorporated in 1994 as DCB Holdings Berhad. The company, a subsidiary of RHB Capital (1066.KL), has been formed by three mergers with Kwong Yik Bank Berhad, Sime Bank Berhad and Bank Utama (Malaysia) Berhad in 1997, 1999 and 2003.

Currently, the bank has a network spanning 8 countries across Asia including Brunei, Cambodia, Indonesia, Hong Kong, Malaysia, Singapore, Thailand and Vietnam.

In 2016, RHB generated revenues of $ 2.6 billion and net interest margins of 1.7%.

RHB Bank’s shares trade on the Bursa Malaysia with ticker RHBC.KL. The bank’s shares have surged 4.9% in 2017 so far.

Hong Leong Bank

Hong Leong Bank, part of Hong Leong Group is the fifth-largest Malaysian bank by assets, and the fourth largest in terms of market cap. The company has a current market cap of $7.8 billion.

Based in Malaysia, Hong Leong Bank has a presence in Singapore, Hong Kong, Vietnam, Cambodia and China.

In 2016, Hong Leong generated revenues of $1.8 billion and net interest margins of 1.8%.

RHB Bank’s shares trade on the Bursa Malaysia with ticker 5819.KL. The bank’s shares have surged 21.8% in 2017 so far.

Valuations

The MSCI Malaysia Financials index is currently trading at a PE of 12.8x and price to book ratio of 1.4x. In comparison, the MSCI Malaysia Index trades at 16.5 times its past 12 months earnings and a price to book ratio of 1.7x.

Investors see valuations of Malaysia bank stocks as lucrative.

Alliance Bank Berhad, AMMB Holdings, RHB Bank, Hong Leong Financial and Affin Holdings are currently trading at inexpensive valuations compared to their peers. They have price-to-book multiples of 0.6x, 0.8x, 0.9x, 1.1x and 1.1x respectively.

Meanwhile, Public Bank, Hong Leong Bank, Malayan Bank, and CIMB Holdings are currently expensive with price-to-book multiples of 2.2x, 1.4x and 1.3x respectively.

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