While they note that the move could strengthen Affin's foothold in the Islamic banking sector, they also don't see much synergies being derived.
Details remain scant as negotiations with Bank Muamalat's two shareholders - DRB-HICOM Bhd and Khazanah Nasional Bhd - are at an early stage.
Two days ago, Bank Negara Malaysia (BNM) gave all parties involved its permission to start the acquisition talks, which must be completed by year-end.
Talks are expected to gain momentum after the Hari Raya festive period.
Assuming a full acquisition, Affin's total assets will widen by 36 per cent to RM77 billion while its gross loan base will increase by 30 per cent.
However, this is not expected to change the group's market ranking. Affin is the second smallest of eight banking groups in the country in terms of assets and loans.
"We see the potential acquisition of Bank Muamalat as an expansion in size and an overlap in Islamic consumer financing. Affin's strength is in Islamic consumer financing, particularly in residential property loans and hire purchase.
"With Bank Muamalat's relatively smaller loan size, we believe that revenue synergies will be limited. Bank Muamalat in the past had high gross impaired loan ratios," banking analyst Kelvin Ong of MIDF Research said in a report yesterday.
The ratio has improved to 4.7 per cent as of March this year from a high of 8.7 per cent in December 2008, but the acquisition may result in a rise in collective assessment charge, he noted.
Ong kept his "buy" call on Affin's stock, which rose by 7 sen, or 2 per cent, yesterday to RM3.55, suggesting a potential 15.5 per cent upside from his target price of RM4.10.
Some one million shares changed hands, triple the previous day's volume.
Bank Muamalat's strength lies in consumer financing and while it is also involved in commercial, corporate and investment banking, growth in these areas remain unexciting.
Its revenue is domestically driven and the bulk of its loans comes from residential property - they comprise about a quarter of its smallish loan base of RM9.4 billion as at end-March - and hire purchase.
"Judging from the loan book, Bank Muamalat appears to be a complementary fit for Affin, given its focus on household lending. But there does not appear to be much benefit from the funding aspect, given that Bank Muamalat's CASA (current account, savings account) ratio is quite close to Affin's," RHB Research analyst David Chong noted.
Affin's plan to buy a stake in Bank Muamalat came as a surprise to some analysts, given that it had long indicated its intention to expand regionally rather than domestically.
As early as June, it had said it was still keen on pursuing an earlier plan to buy a controlling interest in Indonesia's PT Bank Ina Perdana, but was awaiting Indonesian authorities' long-awaited new rules on shareholding limits.
Indonesia has since said single ownership in its banks will be restricted to 40 per cent, which may have put paid to Affin's Indonesian ambitions.
Still, Bank Muamalat may be attractive for Affin, given both banks' ambitions to venture into Islamic banking in China.
Bank Muamalat had last month formed a strategic collaboration with China's Bank of Shi Zui Shan in the hopes that it will have a part in the Chinese lender's plans to set up the country's first Islamic bank in the Ningxia province - where some 30 million Muslims are concentrated - in two years.
For now, it has taken on the costs for training some of the Chinese lender's staff in Islamic banking.
"We believe that Bank Muamalat's upcoming venture into China is complementary to Affin's strategic business direction, given that Affin has recently announced that it is collaborating with Bank of East Asia Ltd (BEA), to set up Islamic banking operations in China in the latter part of this year," said Alliance Research banking analyst Cheah King Yoong, who kept a "strong buy" call on Affin with a target price of RM4.42.
BEA holds a 23.5 per cent stake in Affin.
Still, pricing will be the key as to whether a sale to Affin will go through.
Tan Sri Syed Mokhtar Al-Bukhary's DRB-HICOM, which owns 70 per cent of Bank Muamalat, had twice before attempted to pare its stake - to Bank Islam Malaysia Bhd last year and to Bahrain-based Islamic lender Al Baraka before that - but was unsuccessful.
BNM in 2008 allowed DRB-HICOM to buy the 70 per cent stake in Bank Muamalat on condition that it would eventually sell it down to 40 per cent.
Some analysts reckon that if Affin's offer is attractive enough, DRB-HICOM may give up its entire stake as the conglomerate seeks to pare down its debt.
Affin may also end up owning the smaller lender in its entirety as Khazanah, which holds the remaining 30 per cent stake, is on a mission to divest all non-core investments.
MIDF Research is not expecting Bank Muamalat to come cheap.
"Although Bank Muamalat is not listed, we do not expect it to come cheap. We believe that the PBV ratio for the acquisition will be around 1.5 times," Ong said.
Alliance's Cheah noted that one stumbling block to a deal being done could be the low return-on-equity (ROE) of Bank Muamalat, which stood at just six per cent for the financial year ended March 2012, as compared to Affin's ROE of 9.4 per cent in its last financial year.
Meanwhile, Affin late yesterday reported a 27.7 per cent rise in net profit to RM306.9 million for the first half of the year on the back of higher lending and fee-based income.
Its chairman Tan Sri Mohd Zahidi Zainuddin said in a statement that he expects the group to maintain its earnings momentum in the second half.
Bloomberg data shows that of the eight analysts who track Affin, five have "buy" calls on the stock, two are "neutral" and one with "sell".
Affin's shares have climbed 15.2 per cent so far this year, outdoing the benchmark index's 7.8 per cent gain.
(Business Times / 18 August 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com