PNB-Allied Bank merger to be completed in February

Consolidated earnings expected to decline 7.5% to PHP5.7b this year.

According to Maybank Kim Eng, the long-awaited merger of Philippine National Bank and Allied Banking Corp will finally be completed next month after the Securities and Exchange Commission (SEC) approved the deal last week.

Here's more from Maybank Kim Eng:

Recall that the merger plan started in 2008 but was delayed due to ABC’s shareholdings in foreign bank Oceanic Holding (BVI), Ltd. This was resolved in November 2011.

Integration within two years. Based on our pro-forma analysis, we estimate combined PNB and ABC 2012 net income to reach PHP6.1b (EPS: PHP5.63). For this year, we project consolidated earnings to slightly decline 7.5% to PHP5.7b on higher operating expenses of PHP20.4b. Cost-to-income ratio is expected to remain above 70% in the first two years of the merger.

PNB is looking to spend PHP1.5b in integration expenses, to be offset by at least PHP1b in savings from possible manpower reduction and systems integration. Once PNB is able to take advantage of opportunities for revenue and cost benefits from economies of scale, earnings improvement could happen by 2H14.

TP of PHP83.50/sh, HOLD. The merged entity is expected to trade at a higher multiple given its wider branch network and asset base. Our 12-month target price of PHP83.50/sh is equivalent to 1.4x 2013F PBV, higher than PNB’s historical average PBV of 0.8x.

We expect ROE to remain at single-digit level of 9% due to the expansion in capital base. The ongoing M&A talks with Bank of the Philippine Islands (BPI – HOLD), however, has driven PNB’s share price 25% when the market got wind of the deal in November 2012. Management of PNB has downplayed the ongoing discussion and instead highlighted the merger.

The aim is to improve profitability and increase ROE by enhancing revenues, cross-selling of products and cost control. Nevertheless, the ongoing talks benefit PNB minority shareholders as it could trigger a possible tender offer based on the negotiated price.

We maintain our HOLD rating on PNB until a merger decision is announced. If the merger is finalized soon, the resulting greater size and profitability likely will bring about a re-rating for both BPI and PNB.