Malaysia's top banks fight in final bout of M&A

Malaysia’s leading lenders Maybank and CIMB have both signalled their intention to acquire RHB. Their fight to do so could kick off the country’s last round of bank consolidation.

  • 15 Jun 2011
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Malaysia’s banking industry is a crowded place.

Despite several spates of consolidation, there are still nine major banks and many smaller ones serving a populace of just 28 million.

Yet to judge by developments at the end of May, that number could be about to drastically fall.

On May 31, Bank Negara Malaysia announced that it had cleared the way for CIMB and Maybank – the country’s two banking heavyweights – to bid for control of RHB. They and several other banks and investors had been circling Malaysia’s fifth-largest bank ever since Abu Dhabi Commercial Bank (ADCB) made clear that it wanted to sell its 25% stake in March.

The implications of an acquisition of RHB by either Maybank or CIMB, which respectively rank as the largest and second largest in the country by assets, would be sizeable. It would create a Malaysian super-bank that sits beneath only Singapore’s big three lenders in South-east Asia.

Moreover, such an acquisition would most likely have a ripple effect. Both the losing bank and other lenders in Malaysia might well decide it is high time to grow through consolidation too, to avoid losing out on size and economies of scale.

It’s something that market observers think makes a lot of sense.

“I think the [Malaysian] economy is large enough to support five to six medium- to large-size banking groups,” says Ho Weng Yew, Malaysia head of coverage and origination for the Royal Bank of Scotland (RBS).

Malaysia’s last round of banking consolidation is at hand.

Momentum for mergers

While the acquisition of RHB looks set to be the most important takeover battle in Malaysia’s corporate history, it’s far from the first. In fact, M&A activity in the country’s banking market has been gaining momentum since early May.

On May 7 Hong Leong Bank acquired EON Capital following a 15-month takeover battle. It had finally succeeded in fending off private equity shop Primus Capital Partners, which held a 20.2% stake in the target and had opposed Hong Leong’s acquisition on the grounds that it undervalued EON.

Maybank itself has also been active in M&A. On May 10 it announced that it had completed its purchase of 44.6% of Singaporean brokerage Kim Eng Securities. The purchase brought Maybank’s stake in Kim Eng to 50.2%, bolstering its regional investment-banking capabilities to better compete with CIMB.

While both Maybank and CIMB are now at loggerheads over RHB, they’re not the only interested parties. A host of bidders has since been linked to the stake in Malaysia’s fifth-biggest lender by assets. International names include private equity houses TPG Capital, Carlyle and JC Flowers, as well as Japanese lender Sumitomo Mitsui Financial Group (SMFG) and Singapore’s DBS.

The ultimate arbiter over which bidder gets to control RHB will be Malaysia’s Employee Provident Fund (EPF), the sovereign mutual fund that owns 45% of the bank. However, comments by EPF CEO Azlan Zainol – who also happens to be the head of RHB Bank, part of RHB Capital’s financial conglomerate – heavily hint that a local bank will be picked as the buyer.

He told local newspaper StarBiz on May 4 that his “preference would be for a banking group that has synergies with RHB”.

Other signs also indicate that either Maybank or CIMB will take over RHB. Bank Negara Malaysia governor Zeti Aziz has said the market should decide, but observers believe the central bank would prefer a domestic financial partner. Such an alliance would avoid the complications over private equity divestments or the country’s existing 30% cap on foreign ownership, while ensuring local consolidation.

Enter the heavyweights

Yet while Maybank or CIMB look to be the most likely winners in the battle for control of RHB, neither bank fits Azlan’s stated preference for a bank with good synergies. Such an acquisition doesn’t appear to be justifiable from a perspective of shareholder value, either.

Instead both lenders’ interest stems from gaining bulk.

“The market is rewarding banks by size and the larger the bank gets, synergies come into play, economies of scale, more branches, and a better ability to compete,” says Ho of RBS.

“Maybe one other motivation for Maybank or CIMB to [acquire] is to get to a similar size to [Singapore’s] DBS. DBS seems to be a regional champion for South-east Asia. [Were Maybank or CIMB to take over RHB] you’d have the reach, the kudos, investors coming in and you’re the new largest South-east Asian bank.”

Others concur. “They [CIMB and Maybank] are really looking at the Singaporean banks as their yardstick,” says Ananth Ramachandran, managing director, strategic and client coverage group, Standard Chartered. “It’s easier to attract talent when you have a really large regional organisation.”

CLSA agrees too. In a May 31 research note the brokerage said it believes “the main rationale for both to pursue a merger with RHB is to expand their balance sheet and scale up their operations”. It noted that “both Maybank and CIMB have targets to be among the top three banks in Asean [the Association of South-East Asian Nations]”.

Bolting on RHB would go some way to helping either institution get there. A combined Maybank/RHB would have an asset size of US$171.8 billion, while CIMB/RHB’s would be US$150.1 billion.

At that size, either one would comfortably be the largest bank in Malaysia, and would rank as the fourth biggest in Asean after Singaporean heavyweights DBS, OCBC and UOB.

Were Maybank to win, it would control 26% market share of domestic loans, up from 17%. Meanwhile CIMB’s market share would rise from 13% to 22% if it bought RHB, according to a June 1 report from AmResearch. Maybank’s share of domestic deposits would rise from 14% to 23%, whereas CIMB’s would be 22%.

Shareholder devalue

Yet such an increase in size would come at a steep price.

Whoever wins in acquiring RHB is unlikely to pay much less than a value of 2-2.5 times book value, and they would most likely have to fund the acquisition through a combination of shares, hybrid capital and sub-debt. That would see the winner’s return on equity (ROE) and earnings per share drop considerably.

AmResearch estimates that if CIMB acquires RHB at 2.5 times price to book, its ROE would be likely to drop from 18% to 14.6% by the end of 2011.

Much of this fall would be due to the lack of synergy.

“Both Maybank and CIMB have sizeable consumer banking, corporate banking and investment banking businesses and the addition of RHB Cap, we believe, would bring few synergies to the acquirer,” says a Citi report on the merger plans, dated May 30. “There will likely be substantial duplication of branch network in a merger and the key challenge is rationalising the operations post-merger, given the difficulty in retrenching staff in Malaysia,” adds CLSA.

On the positive side, RHB would bring two unique revenue capabilities to either CIMB or Maybank: its larger public-sector project financing business, estimated at MYR10 billion (US$3.3 billion), and its ‘Easy’ outlets – small, easily deployable sub-branches that offer a handful of consumer products – which have leapt to 155 from only 112 at the start of the year.

RHB’s presence in Singapore with seven branches could also be attractive, particularly to CIMB, which has only two branches in the city-state.

Moving the needle

Despite the negative implications for shareholders and precluding the entrance of a dark horse, there is a good chance that a Malaysian super-bank will emerge soon. And that could well cause other dominoes to fall.

“If there is a deal [involving RHB] among domestic banks it is absolutely going to spur more transactions,” says StanChart’s Ramachandran.

“Nine local banks in the industry is a little bit too many so even the central bank has said that they need to see further consolidation,” says Clare Chin, head of Malaysia research for CLSA.

Whichever bank loses the two-horse race for RHB is likely to be the first mover in ongoing consolidation. It could well seek to make an acquisition for the sake of catch-up.

It’s not the only one that may do so. RHB’s domestic purchase could even prod Public Bank, the country’s conservative third-largest lender, to seek out an acquisition of its own.

And who would these banks target? The ones below them. The somewhat smaller AMMB is one. It is also interested in acquiring, and was widely touted as an early contender, for RHB. However its relatively small size makes it a potential target.

Plus there are Malaysia’s two smallest banks, Affin Holdings and Alliance Financial Group (AFG). The two are estimated to be worth only 0.9 times and 1.2 times price-to-book respectively, according to the Citi report.

Local paper The Edge Malaysia reported in February that Langkah Bahagiah wanted to sell its 14.8% stake in AFG. It also reported that Singapore’s Temasek was interested, even though the sovereign wealth fund already has an indirect interest in AFG. The newspaper speculated that Temasek might want to consolidate its banking interests in the region under the DBS umbrella.

“Even without a deal [for RHB] I wouldn’t be surprised if someone is looking at Affin and Alliance,” says Ho of RBS. “Those two are really right at the end of the scale, something’s got to happen.”

Islamic and investment banks

Acquisition-minded lenders could also seek to bolster either their investment or Islamic arms by consolidating one of Malaysia’s smaller Islamic banks – of which it has 18 – or investment banks, 14 of which exist in the country.

Again, that’s a lot of specialist institutions for a small country, so consolidation seems a natural step. However it remains unclear whether these specialist institutions will merge amongst themselves or be snapped up by one of the larger banking outfits in the country.

Merger rumours surround the investment banks. The Edge Malaysia reported on May 16 that K&N Kenanga Holdings was close to signing a deal to buy rival boutique investment bank ECM Libra Financial Group. And in November last year, Maybank was speculated to be looking at OSK Holdings, although such a deal never materialised.

Another interesting player is KAF Investment Bank, known as the country’s biggest discount house.

“They’d be an asset to anyone; their business is large and they’re quite a formidable player,” says one Malaysia banks analyst, who declined to be named.

Consolidation among Malaysia’s Islamic banks is increasingly likely too.

Bank Islam, owned by Islamic financial group BIMB and the number two Shari’ah (Islamic law-following) bank in the country after CIMB Islamic, was rumoured to be considering a tie-up with rival Bank Muamalat. DRB-Hicom, majority owner of Muamalat, has said that it would consider such a tie-up. However Bank Islam said on May 25 that it was unable to consider such a merger at this stage, scuppering the talks for now.

But that may not be the end of the matter. Industry observers say that the deal is still a possibility down the track and that further consolidation within the Islamic banking sector is expected.

“In Malaysia there is certainly going to be some kind of reshaping in terms of the Islamic banking outlook and there will be consolidation,” says Ramachandran of StanChart.

Decisive factors

Given the dizzying number of rumours in Malaysia’s media and financial circles about potential consolidation, it’s hard to predict how its banking sector will end up looking.

Even the merger du jour of RHB is not guaranteed. Several private equity outfits have been linked to ADCB’s stake, as well as foreign banks such as DBS and Japan’s Sumitomo Mitsui Financial Group. And while Maybank and CIMB both say they are interested, either or both of them could walk away from the table.

But further banking consolidation in Malaysia looks increasingly inevitable, whether it is through the acquisition of RHB, Affin, or Alliance, or via tie-ups with smaller investment banks or Islamic lenders.

Ultimately the most influential party in the next set of consolidations will be the government. In Malaysia, three of the largest four banks have sizeable stakes owned by various government agencies. Amanah Raya Trustees and EPF between them control 57% of Maybank; Malaysia’s sovereign wealth fund Khazanah Nasional owns 28% of CIMB, and EPF has 14% of it, as well as its 45% stake in RHB.

Noting how critical the state’s involvement is in the banking sector, StanChart’s Ramachandran asks: “If there’s going to be domestic consolidation, how do these shareholders agree to work together and make these things happen?”

If Kuala Lumpur wants to consolidate the financial sector in a responsible manner while simultaneously reducing its involvement, as it has said in the past, it should unite its various investment factions behind a grand strategy.

“In order for [the banks] to become regionally relevant players, they have to grow in size so some of these [government agencies] will have to agree to become a smaller shareholder in a much larger bank,” posits Ramachandran. “I think those kinds of internal understandings have to take place.”

If the government can corral its various agencies to follow such a plan, the impact could be sizeable. Of course, a lot will depend on valuations, sensible business fits, and smart execution.

But do it well, beginning with RHB, and Malaysia could end up with a streamlined financial sector that boasts some very influential players.

  • 15 Jun 2011

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