Analysts not surprised by Bank Negara’s decision on Affin bid for EON Cap

Thursday June 10, 2010



By ELAINE ANG

elaine@thestar.com.my



PETALING JAYA: Analysts are not unduly surprised by the central bank’s decision to not consider Affin Holdings Bhd’s application to commence talks with EON Capital Bhd (EON Cap).



Many are of the opinion that a possible roadblock could be Affin’s comparatively smaller and weaker position versus EON Cap resulting in the concern that Affin’s financials may not be able to digest the acquisition.



“We are not surprised at this turn of events. Affin is a smaller bank in terms of assets, loans and deposits compared with EON Cap.



“Affin’s asset quality is also weaker than EON Cap’s,” an analyst at a local stockbroking firm said.



As at March 31, 2010, Affin, the eighth largest banking group in the country, has total assets amounting to RM40.8bil, loans of RM23.5bil and deposits from customers worth RM29.2bil versus seventh largest EON Cap’s RM46.3bil, RM32.8bil and RM35bil respectively.



In terms of asset quality, Affin’s gross impaired loans ratio is 4.6% compared with EON Cap’s 4.2%.



To recap, Affin had submitted an application to commence negotiations with EON Cap to the central bank on May 4.



The central bank conveyed its decision to Affin that it was unable to consider Affin’s application on Monday. Bank Negara had not given any reason for its decision and declined to elaborate on the matter.



In addition, given Affin’s smaller scale versus EON Cap’s, system and business integration could be a key drag over the immediate to medium term. CIMB Group, which was much larger in scale compared with Southern Bank Bhd, took nearly three years to fully integrate and reap the merger synergies from its acquisition of Southern Bank.



Moreover, Affin would almost certainly need to raise capital for an acquisition of EON Cap.



Analysts have speculated that Affin would most likely have financed the purchase of EON Cap via a combination of cash and/or shares. Affin may also need to raise funds via a rights issue.



An analyst with a bank-backed research house noted that although Affin would be able to restore its capital position with a rights issue there would be significant dilution to earnings per share and book value at the new merged entity.



He noted that given EON Cap’s larger market capitalisation and asset base, it was not viable to include a large portion of equity into the mode of settlement to EON Cap shareholders, who would then potentially end up owning a larger stake in the enlarged Affin group.



The analyst said Bank Negara might also have considered that a merger with EON Cap’s other suitor, Hong Leong Bank Bhd (HLB), would result in a much stronger banking entity competing in a liberalised banking environment given the greater merger synergies and scale.



The merged HLB-EON Cap would have total assets worth RM126.4bil and a loans to deposit ratio of 75.7% versus Affin-EON Cap’s total assets of RM86.2bil and loans to deposit ratio of 93.9%.


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