CIMB: Malaysia merger moves Asia

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CIMB power grab looks set to shake up the region’s banking landscape.

CIMB-R-envelope

In the post-crisis landscape, the mere mention of bank M&A immediately strikes fear into the hearts of shareholders, given the history of red-blooded bankers, from the US, Europe to Asia, destroying value while over-estimating cost-savings and business-synergies, in a misguided bid to expand their empires.

It is all-too easy to forget, therefore, that a wave of bank-consolidation across most emerging markets is badly needed to reduce the cost of capital, deepen local capital markets and develop long-term financing solutions in local currencies.

Just as financial and technological innovation propelled the bank M&A drive in the 1980s and 1990s in the US, bank-consolidation in Asia is a matter of when, not if.

The proposed merger of Malaysian lenders CIMB, RHB Capital and Malaysia Building Society (MBSB) could be the much-needed catalyst that awakens regional regulators and Asian bankers from their complacent slumber. Post-integration, the group would be the largest financial lender in Malaysia by assets and the fourth-largest lender in south-east Asia, bringing the country’s decade-long bank-consolidation drive to a climax.

Turbo charge

Given the zeal of the country’s regulator, it is unlikely that the merger will give lenders the incentive and the leverage to squeeze higher margins from clients, while cutting low-margin but socially-useful services. Post-merger, a stronger domestic franchise in Asia would turbo-charge CIMB’s cross-border operations, allowing it to grab a larger share of regional lending and trade financing from the likes of DBS, Singapore’s largest lender, Standard Chartered, Citi and HSBC.

The combined group would boast strong investment-banking capacity in local currencies, challenging already-struggling Western investment banks, and a strong Shariah-compliant franchise, boosting regulators’ bid to position Malaysia as an innovative financial hub and the leading global Islamic centre.

Further reading

Islamic finance awards 2014: CIMB

The regulatory appetite for cross-border bank M&A in Asia – which could help to facilitate intra-regional capital flows, investment-banking activity and dollar liquidity – is minimal, especially given the large number of national champions with government stakes. Nevertheless, if the post-merger bank is successful it could promote a wave of competitive consolidation across the region, and re-awaken talk of a DBS-Standard Chartered merger, as lenders scale up to defend market shares.

However, the chronology of events – the announcement of the mega-merger, seen as driven by the much-respected outgoing CIMB chief executive Nazir Razak, the younger brother of Malaysia’s prime minister – has perplexed analysts. Razak is set to become CIMB chairman next month and analysts view his steady hand at the tiller as key to a successful implementation of the merger.

Shareholder hospitality towards the transaction is unclear as full details of the proposed transaction have yet to be disclosed. There are few obvious synergies between CIMB and RHB, however, so the cost of integration is likely to be substantial.

There are a litany of challenges: CIMB will require new equity; RHB and MBSB need more deposits for funding; while the political challenge of reducing excess staff and branch-networks, is significant. The complexity of merging with MBSB, which has 70% of gross loans in unsecured lending at a time of rising credit-quality concerns, will scare some shareholders. What’s more, the investment bank of the merged

entity might also suffer from over-capacity given CIMB’s strong network and RHB’s acquisition of OSK Investment Bank two years ago.

The merger then could take years. The market has under-estimated the challenge of integrating the proposed behemoth and cost discipline will be key. But in the long-term, it will reshape the Asian banking landscape.