• Keep BUY, new MYR5.50 TP from MYR5.10, 22% upside, c.5% FY25F (Mar) yield. DBS (DBS SP, BUY, TP: SGD44.70) is possibly interested in acquiring a 29.1% stake in Alliance Bank Malaysia, most likely via the latter’s largest shareholder, Vertical Theme. We think such a deal makes sense, as it helps Singapore’s largest bank fill a gap in its ASEAN presence. Concurrently, ABMB could benefit from DBS’ reach, clientele, and banking expertise.

• Another sector M&A before the year ends? According to Reuters, DBS is exploring expanding into Malaysia via a potential acquisition, with ABMB and Kuwait Finance House’s Malaysian retail banking assets touted as possible targets. Given that Temasek is a common major shareholder in both ABMB and DBS, a DBS-ABMB deal may make more sense in our view. ABMB’s largest shareholder is Vertical Theme (29.1% stake in the bank), which, in turn, is owned by Langkah Bahagia (51%) and Duxton Investments (49%) – the latter owned by Temasek. Acquiring Vertical Theme’s entire stake in ABMB could cost DBS MYR2bn, based on last Friday’s close.

• What is in it for DBS? In its recent briefing, DBS had said it is open to M&A opportunities, with Malaysia being mentioned as one of five markets of potential interest. The Singaporean bank currently has an offshore banking exposure here (no onshore). Malaysia is among the main beneficiaries from the global repositioning of supply chain and China+1 diversification strategies and, in our view, therein lies DBS’ interest to extend its presence here, ie to better capture connectivity flows into ASEAN and intra-ASEAN. This is given that DBS already has a decent presence in Greater China. ABMB is also a strong player in the domestic SME banking space, making it a beneficiary – albeit more indirect – of Malaysia’s strong economic growth.

• Whatis in it for ABMB? The bank could benefit from DBS’ expertise in digital banking and wealth management – offerings that ABMB is increasingly incorporating into its business. It could also benefit from the onboarding of DBS’ Greater China clients (as above), adding more direct exposure to foreign direct investment into Malaysia. We understand Temasek/Vertical Theme currently has two non-executive representatives on ABMB’s board of directors. Hence, a stake transfer to a more active shareholder – especially one with a regionally established banking background – could be a positive.

• Our thoughts. According to the Financial Services Act 2013, Bank Negara Malaysia’s approval will be required for the transaction to go through. However, we think the deal makes sense from both the acquirer and acquiree’s points of view. Synergies look rather straightforward and could propel ABMB towards becoming a bigger player in the domestic business banking space. We think investors will react positively to this development. Hence, we lower our risk premium factor for ABMB – this lifts our TP to MYR5.50, which includes an unchanged 6% ESG premium.

Source: RHB Securities Research - 11 Nov 2024