Edge Weekly Stage set for M&A (Banking)

 By Surin Murugiah  / theedgemarkets.com   | June 11, 2016 : 9:26 AM MYT   

KUALA LUMPUR (June 11): The Edge weekly in its latest edition said that the changing landscape in the banking industry is setting the stage for another round of mergers and acquisitions (M&A).

In its cover story, the Edge’s assocciate editor Joyce Goh wrote the economic downturn that started a year ago and which is projected to continue for another 12 to 18 months had resulted in a tough operating environment for banks, as reflected in their shrinking profits and weak share prices.

Goh wrote that to mitigate the adverse effects of slowing growth, all banks have been forced to cut operating costs to protect their profit margins.

The weekly however said given that the economic environment is not going to improve anytime soon, and with increasing competition, stricter capital requirements and the need to up the technology game, it will be a case of survival of the fittest.

The Edge said that as at June 7, the nine listed banking groups were trading at a price-to-book ratio of between 0.5 and 2.4 times (see table). Taking out the most expensive bank — Public Bank Bhd, which is trading at 2.4 times — the banks are trading between 0.5 and 1.7 times.

As for return on equity (ROE), the nine banks’ range from 5.7% to 18.2%.

Citing a banking analyst, the Edge said ROEs are lower nowadays because of strict capital requirements.

“This is the new normal — ROEs averaging at 11%. Prior to this, ROEs of banks averaged about 15% in 2010. When looking at the ROEs today, one has to take into account capital-raising because of the Basel III requirements. So, for any M&A to be considered, the banks need to think of capital. Either they have to raise capital or make sure their capital doesn’t get deducted,” the magaxine quoted her as saying.

Meanwhile, the Edge reported that in the regional space, the banking industry has seen several M&A, and some of them involved capital raising.

It said Singapore’s Oversea-Chinese Banking Corp Ltd (OCBC) announced a one-for-eight rights issue to raise S$3.3 billion to ensure its capital ratios were maintained at prudent levels following its acquisition of Hong Kong’s Wing Hang Bank in 2014.

The HK$38.4 billion (S$6.2 billion) takeover translated into a price-to-book ratio of 1.77 times.

For the full story on the banks M&A sphere, please get at copy of the Edge weekly edition for the week of June 13 – June 19 available at newsstands now.