Bank mergers in Malaysia get difficult

(The Star) – MERGER fever has definitely hit the banking sector. Assuming the three-way merger of CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) goes ahead, then more marriages are going to take place in the sector. The aim is to create regional giants.

It is common knowledge in banking circles that the central bank would like to see all attempts first being made with local banks merging with each other, before the entry of foreign parties.

That philosophy has its merits.

When one Primus Pacific Partners was allowed to buy into EON Capital Bhd back in 2007, it had led to some complications.

Primus Pacific, a Hong Kong-based private equity firm, was then the single largest shareholder of EON Cap and against the sale of EON Cap to Hong Leong Bank Bhd (HLB) in 2010, partly because it had bought its 20.2% stake in the banking group at a high price.

It took some 17 months for the deal to close, during which Primus Pacific took the bank and its directors to court to challenge the takeover.

So, which are the banking candidates most likely to end up getting hitched or becoming part of a merger and acquisition (M&A) move?

For starters, many observers are expecting Malayan Banking Bhd (Maybank) to look for a deal in response to the mega-merger proposal spearheaded by CIMB.

The CIMB-RHB Cap-MBSB merger would create a group with a combined asset estimated at RM613.7bil and stands to generate profits of close to RM7bil. This is slightly larger than Maybank with an asset size of RM578bil and profit of about RM6.5bil.

As an aside, it is noteworthy that Maybank not only faces the prospect of an opponent that’s bigger than itself – something which it hasn’t had to deal with since a long, long time ago – but that there’s also the possibility that this new enlarged entity could be headed by a person Maybank had decided against becoming its own chief executive officer when former head honcho Datuk Seri Abdul Wahid Omar left to join the Government.

Tengku Datuk Zafrul Tengku Abdul Aziz and Datuk Khairussaleh Ramli, who had been frontrunners for the bank’s key position, subsequently left the banking group and now play key roles in rivals CIMB and RHB, respectively.

Speculation is that they are possible candidates to head the merged entity.

This brings us to the next question: Who will Maybank’s targets be?

The first names that would crop up are the two smallest banks – Affin Bank Bhd and Alliance Financial Group Bhd (AFG). These banks, however, have strong major shareholders in the form of the Armed Forces Pension Fund Board, or Lembaga Tabung Angkatan Tentera (LTAT), and Singapore’s state investor Temasek Holdings Pte Ltd, respectively.

Affin Bank’s parent, Affin Holdings Bhd, had early this year acquired Hwang-DBS Investment Bhd for RM1.36bil, edging out competitor AMMB Holdings Bhd. So, it is likely that LTAT, which manages over RM8bil in total aseets, would want to keep its commercial bank. But can Affin Bank manage to stay successful on its own?

In terms of asset size, Affin Bank’s size stands at RM55.16bil, while Alliance Bank comes in at RM40.05bil.

Some industry observers reckon that it would be difficult to minus LTAT from the banking equation on the premise that Affin may be able to carve its own niche with a stronger market presence in investment banking.

Then, there is the Bank of East Asia Ltd (BEA) factor, which is Affin’s second-largest shareholder with a 23.5% block. Any M&A involving Affin would have to get the nod of BEA.

As for Alliance, Langkah Bahagia Sdn Bhd has for some time now been rumoured to be looking to exit. Langkah Bahagia and Temasek are the major shareholders of AFG, via a joint-venture known as Vertical Theme Sdn Bhd.

The question is: Will Temasek want to grow its stake? And will it be allowed to be consumed by DBS Bank Ltd in the future? About two years ago, Singapore’s DBS had sought to penetrate the Malaysian market via Temasek’s stake in AFG but that had hit a snag.

AmBank Group has a strong shareholder in the form of Australia and New Zealand Banking Group (ANZ), which owns 23.8% in the holding company AMMB Holdings. Talk is that AmBank group chairman Tan Sri Azman Hashim, who indirectly holds 16%, may be looking to offload more shares to ANZ.

In the case of HLB, dealing with it is not going to be easy, as its shrewd major shareholder Tan Sri Quek Leng Chan is not likely to want to sell out at a low price or buy at top price.

While in the case of Public Bank Bhd, its future is cast by nagging concerns over its succession planning despite repeated assurance from its management.

At a price-to-book valuation of 3.4 times, it is the most expensive bank in Malaysia for any suitor to consider.