M&A speculations still circulating around Malaysia’s banking sector

Hwang DBS Vickers Research said there is still room for Malaysian banks to consolidate after speculations that Alliance Financial’s major shareholders will sell their 29.1% stake surfaced.

The banking sector is abuzz again on potential mergers and acquisitions (M&A), after rumours surfaced that major shareholders of Alliance Financial Group (AFG) may divest out.

In a research note on Monday, Hwang DBS Vickers Research said there is still room for M&As, but pricing remains the key. "There is still room for Malaysian banks to consolidate and the idea of creating regional champions is still on the cards," it added.

It was reported recently that Temasek Holdings and Langkah Bahagia are keen to divest their combined 29.1 per cent stake in AFG.

The research house favours AFG for its scalable domestic franchise and non-interest income traction, which it said will boost sustainable earnings and ultimately return on equity (ROE). "Its attractive valuation, coupled with strong earnings visibility going forward, makes AFG stand out as a gem in the next round of bank consolidation," it added.

It said non-interest income is one of AFG's crucial ROE building blocks, and it targets to grow this source to 30 per cent of total income from 20 per cent in the next three-five years. "As competition continues to dampen net interest margin (NIM), we believe AFG is on the right track on growing non-interest income as the building block to enhance ROE," it reiterated.

On another note, HwangDBS Vickers Research said although RHB Capital M&A talks appear to have taken a backseat, the possibility of further talks in the near term may still be on the table.

View the full story in The Malaysian Star.