Malaysia: Banks seek fresh course after merger collapse

By:
Rob Hartley
Published on:

Malaysia’s banking community prepares for the next chapter after an attempt to merge three banks ends in failure to complete the deal.

The collapse of Malaysia’s highly anticipated banking mega-merger left the companies involved with more than a sense of anticlimax. 

The pressing need to dust off old strategic goals or hastily think up new ones is likely to have been at the forefront of managerial minds at CIMB Group, RHB Capital and Malaysia Building Society (MBSB) once the prospect of the three-way tie-up had dissipated.

The firms entered into an exclusivity agreement to discuss various deal specifics in July after the central bank of Malaysia gave a green light to the talks. 

However, the announcement on January 14 that several months of discussions had come to nothing dashed both the possibility of Malaysia creating a new regional champion, with a large Islamic bank, and set the scene for a new competitive landscape.

There's a bit of relief from the line people, 
as we still have a lot to do on our own
CIMB source

The banks were keen to point to current economic conditions and an inability to create value for all stakeholders as some of the reasons for the breakdown of the deal, but a senior source inside CIMB highlights more specific reasoning for the failure of the merger.

"It meant getting rid of some people and also redeploying some people in the mega Islamic bank," the CIMB source tells Euromoney, stressing that voluntary redundancy was the aim. "Whether we could have pulled off the layoffs in this economy was not certain. We didn’t think the anticipated cost cuts could be met in this environment."

The merger would have undoubtedly brought increased prestige due to the scale of the combined firm, but within CIMB Group - Malaysia’s second largest financial services provider - the breakdown of the plan does not appear to have been met with disappointment by all.

"I think there’s a bit of relief from the line people, as we still have a lot to do on our own," says the source. "At the same time, the fact that we would have been the largest bank was very appealing, but at the end of the day, the time was not right. Basically, we are going to focus on costs and try to do our own restructuring."

A strategy document issued at the start of February revealed the company will look at reducing its overall investment banking operating cost by about 30% in 2015 along with reshuffling its divisions and some key personnel. 

CIMB bought several investment banking units in Asia-Pacific from Royal Bank of Scotland in 2012. CIMB’s aims are also now understood to involve bringing down headcount and other costs across the group.

However, expansion is also on the agenda, with the lender potentially seeking an acquisition or a licence in the Philippines. A licence for the Vietnamese market could also be sought, according to the source.

RHB looks more likely to be an acquisition target for the bigger players, with analysts pointing to the benefits for some of the larger banks of buying up RHB.

"Consolidation will still remain a theme in Malaysia," says Ivan Tan, director, financial services ratings, Standard and Poor's. "Malaysia is a fairly saturated and overcrowded banking system, and the government has been trying to encourage consolidation for a while. 

"I think the mid-sized banks, including RHB, are attractive from an M&A perspective. It’s just a matter of valuation and timing."

Candidates to acquire a firm like RHB could include CIMB or its main rival, Maybank, but they may be looking mainly outside Malaysia for the main benefits of any transaction.

"While there would be substantial duplication for Maybank or CIMB in their home market if they acquired RHB, the acquisition would lead to complimentary operations in their overseas markets," says Simon Chen, analyst and assistant vice-president at Moody’s.

Islamic finance

The strong Islamic finance presence of MBSB was set to be a cornerstone of the new enlarged Islamic bank after the merger. 

Tat Chung Wong, partner at Malaysian law firm Wong Beh & Toh, thinks the development of Islamic finance is still a government objective and MBSB will be part of some kind of merger in the long run.

"Certainly, the development of the Islamic financial sector as well as the banking sector, generally, are important aims for the government, and the merger of these banks would, in my view, have been in furtherance of these aims," says Wong.

"The ending of the merger was not, perhaps, unexpected, having regard to the circumstances. I don’t see this as being the end of it. At some stage there could be a revival of interest, but maybe not between exactly the same parties."

The completion of the three-way merger and the creation of a Malaysian regional champion was something that was expected to have an effect further afield than the home market. The impact of the collapse on regional competitors might not be so immediate, but the collective relief that a new and ambitious rival will not emerge for the time being will be welcomed.

However, while the setback will still be fresh in the minds of many in Kuala Lumpur, new plans are now replacing the old, and consolidation looks set to stay on the agenda. Malaysia might yet have its regional champion.

RHB declined to comment and MBSB did not reply to a request for comment.