Merger plans set to transform Malaysian banking sector

Plans by three of Malaysia's biggest lenders to merge into the country's largest bank conglomerate have thrown a spotlight on the health of the industry.

CIMB Group last week revealed plans to buy smaller rivals RHB Capital and the Malaysia Building Society, a plan that would create a group with total assets of RM 614bn ($192.8bn) and a 23% market share of domestic loans. This would eclipse the current market leader Maybank's worth of about RM 578bn ($181.49bn) and market share of 18%.

The three confirmed on July 2 that they had obtained approval from Malaysia’s Central Bank or Bank Negara Malaysia for the deal and have since entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure, and other relevant terms and conditions. The banks say part of the aim is to create a ‘mega Islamic bank’ by tapping in to the country's status as one of the world’s leading Islamic finance centres.

"Bank Negara has long been talking about creating regional [banking] champions. Given that the Malaysian banking industry has reached a challenging level in terms of organic growth, size does matter,” Sue Lin Lim, an analyst at AllianceDBS, told London's Financial Times.  

Slow start

The deal may also give the domestic banking sector a boost amid criticism that growth has been stale this year. Bank Negara this month revealed that loan growth had slowed to 9.7% year-on-year (y-o-y) in May from 10% y-o-y in April, due mainly to a slowdown in business loan growth.

"Suddenly an industry faced with dull growth prospects amid growing competition is abuzz again," wrote the Edge magazine in an editorial. "This will be the largest banking merger in a very long time and which could potentially change the current landscape."

Although mainly related to business growth loan, the decline in May follows central bank measures last July that saw the maximum tenure for personal loans reduced to 10 years, home loans restricted to no more than 35 years, and prohibiting offers for pre-approved personal loans.

An RHB Research survey in July saw the agency downgrade its rating on Malaysian banks to “neutral” from “overweight”.

“A consistent message that came out of our recent meetings with banks was that business lending has been subdued, while capital markets remain quiet,” RHB Research analyst David Chong noted in his report.

The loan decline contrasts with rosy predictions made by the World Bank last December. Touting Malaysia as a success story in terms of financial inclusion and quality of banking regulations and supervision, the bank said the sector was poised for further growth this year.  

Regional aspirations

Despite global fluctuations in the economy caused by higher US interest rates, Malaysia’s banks recorded 17% profit growth overall in 2013. The World Bank forecast opportunities for the expansion of banks, both in the domestic and regional marketplaces.

It is the latter market that the new group is expected to target, with some considering the deal a statement of intent as ASEAN deepens its financial integration. A table of top 10 banks’ pretax profits in ASEAN compiled by The Banker shows Maybank in fourth place behind Singapore’s OCBC, DBS and United Overseas Bank.

“The next big thing for Malaysian banks is to venture abroad, and with this merger, it could be a game changer for CIMB in the ASEAN region," an analyst who wished to remain anonymous told Malay Mail.

However those in the market had expected the push towards Islamic banking to come from BIMB Holdings, a holding company for various sharia-compliant businesses in Islamic banking, insurance and stockbroking. The combined assets of the three banks will still rank second after Maybank in terms of Islamic banking assets, Lim pointed out.  

Integration hurdles

But before the new conglomerate can start targeting Southeast Asia, it will first need to navigate the complex three-way merger process and address challenging integration issues.

For instance, critics have noted overlap between CIMB and RHB in investment banking services and retail services. A similar deal touted in 2011 was likely scrapped because it was felt the companies offerings would blur. Because the prospective merger’s branch total would equal 550, compared to Maybank’s 399, it seems likely that the new grouping would face a potentially painful period of consolidation.

“The ability to extract these cost synergies may be a hurdle in the near term as it would largely depend on rationalising branches and staff, which could be politically unpalatable,” said ratings agency Fitch in an analysis of the proposed merger.

Although analysts differ on the logic behind the merger, most agree that it signifies a new dawn for the banking sector where size will matter more than before as lenders look to compete on a regional level.

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