Kenanga Research says AmBank is a prime candidate for consolidation in the banking industry.
PETALING JAYA: The prospects of AMMB Holdings Bhd
(AmBank) restarting merger talks with other financial institutions appear brighter now amid a more sustainable industry outlook.
This notion is also supported by the current attractive valuations of AmBank.
According to Kenanga Research, AmBank is a prime candidate for consolidation in the banking industry.
Reflecting on past headlines concerning possible mergers and acquisitions (M&As) involving AmBank, Kenanga Research said the group’s current fundamental outlook and prevailing macro climate could present a more palatable opportunity for both AmBank and prospective buyers.
AmBank had reportedly been in M&A talks with several financial institutions, including RHB Banking Group and Grab Holdings Ltd, over the past few years, but no deal had materialised thus far from these negotiations.
“The failure thus far for any deal to materialise could be attributed to impasse regarding pricing, and changes in operating environment,” Kenanga Research said.
“However, we opine that the prospects for talks of consolidation could now be brighter,” it argued, pointing to a sustainable industry outlook, fairer valuations and a more manageable social impact as supporting factors.
Kenanga Research maintained its “outperform” call on AmBank, with an unchanged target price of RM5.05.
It said potential M&As provided a more speculative angle for AmBank’s stock.
“That said, we do believe the group could do well fundamentally as a key beneficiary of the economic recovery from its notable small and medium enterprise (SME) loan profile (21%) with asset quality concerns on household sector aside,” Kenanga Research said.
“The group also seeks to enjoy a better long-term growth trajectory from more aggressive partnerships against its peers,” it added.
Post Covid-19, Kenanga Research said, a sense of confidence had been reinvigorated in the banking sector, particularly as impairment needs had rationalised. While loans growth could still see some challenges in line with gross domestic product expectations, it said the sector’s resilience would remain intact.
The brokerage projected AmBank to register an earnings per share growth of 7% for the financial year ending March 31, 2024 (FY24) and 10% for FY25. It expected the group’s return on equity ratios to hover around 10%, were stronger than pre-Covid years.
Kenanga Research noted that AmBank’s forward price-to-book valuations (PBV) fell to its lower at 0.55 times in July 2021 amid heightened uncertainties then, which alluded that AmBank would require a further discount for a deal to occur.
However, with fundamental strengths established and past development under wraps, AmBank had reverted to historical levels of 0.70 times forward PBV before diminishing again but this time from a sector-wide de-rating owing to unfavourable developments in the global banking scene, the brokerage noted.
“We opine that for long-term recovery to continue, a 0.70 times forward PBV valuation price tag would be a more acceptable price for stakeholders. A premium from this could also be applied for the group’s increasing presence in the fast-growing SME space,” Kenanga Research said.
“Arguably, AmBank is also more fundamentally sound now with cost-income ratios staying below 50% (as compared to pre-Covid averages of 60%),” it added.
Kenanga Research also noted that with a more stable job market post the pandemic and a new mandate given to a new government, it believed various stakeholders would be more open to the idea of banking consolidation that would ultimately bring long-term benefits to the economy.
