08 May 2012
OSK acquisition will add to RHB's existing leverage and may affect ability to pay dividends and repay debts, but benefits and synergies on cross-selling from complementary client bases outweighs - Credit rating agency Moody's
(OSK closing stock price today (8.5.2012) was RM 1.65)
(RHBCAP closing stock price today (8.5.2012) was RM 7.56)
RHB Capital Bhd's (RHBCap) acquisition of OSK Investment Bank Bhd will subject RHB Group's profitability to greater volatility as it shifts its business mix towards riskier and market-sensitive activities, Moody's Investors Service Singapore Pte Ltd said.
The credit ratings agency said the merger is credit negative for RHB Group and its wholly-owned commercial banking subsidiary, RHB Bank Bhd.
"The acquisition will add to RHBCap's existing leverage, thereby adding pressure on its banking arm, RHB Bank Bhd, to devote more dividends to fund both the holding company's debt repayments and the group's dividend payments," its analyst Simon Chen said in a report yesterday.
"This greater pressure to direct more profits to the holding company will diminish RHB Bank's ability to retain profits to replenish its capital for further business growth and improvements in its capital adequacy," he added.
With total assets of RM10.2 billion (US$3.4 billion) at end-2011, OSK is 7% of the size of RHB Group.
"We estimate the inclusion of OSK will increase the proportion of RHB Group's assets in investment banking business to 10% from 4%, and shift its business mix towards riskier and market-sensitive activities that will subject its profitability to greater volatility," said Chen.
RHB Group has a policy of paying 30% of its profit as dividend. RHB Bank constitutes 94% of the group's assets and contributes 98% to its income, making the holding company heavily reliant on RHB Bank's distributed profits.
In addition, the impending integration with OSK may present a formidable management challenge as RHB Group has already experienced several top-level departures since the beginning of 2011.
"A failure to retain key personnel, especially in OSK's core investment banking business, will raise further questions of whether the holding company has sufficient resources to manage the risk created by the merger," said Chen.
Assuming RHBCap pays two times OSK's book value for the purchase and that the payment is 50% in cash and 50% newly issued equities, Moody's estimates that RHBCap's double leverage ratio will increase to 159% from 149%, based on 2011 financials.
"If the payment is made entirely in cash, we estimate its double leverage ratio will surge to 195%," said Chen. As at end-2011, RHB Bank's core Tier 1 ratio was 11.2%, slightly below the industry average.
On a positive note, Moody's said the addition of OSK IB to RHB Group will increase the holding company's and RHB Bank's regional operations and accelerate its growth in Southeast Asia, which is consistent with RHB Group's regional expansion plans.
"In addition, the merging companies' client bases are complementary, which adds to synergies on cross-selling and product capabilities. However, these benefits are more than outweighed by the merger's effect on RHB Group's and RHB Bank's credit profiles," said Chen.
On April 27, RHBCap received the Ministry of Finance's nod to merge with OSK IB through a share purchase, the details of which the companies will finalise later.