Fitch: Malaysian Bank Mega-Merger Comes with Risks

Mon Jul 14, 2014 12:50am EDT

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(The following statement was released by the rating agency) SINGAPORE, July 14 (Fitch) The proposed merger of CIMB, RHB and Malaysia Building Society (MBSB) is ambitious, and will bring inherent challenges and risks for the new banking group amid a complex integration process, says Fitch Ratings. Cost synergies will exist but may be challenging to extract in the short term; and the merger could weaken capital buffers for CIMB if not funded by sufficient new equity. The new proposed group would stand out as the largest bank in Malaysia and the fourth-largest lender in south-east Asia, with total assets of USD194bn and a 23% market share of domestic loans versus Maybank's 18%. The resulting additional scale will present opportunities for synergies at a time when growth prospects in the Malaysian financial system are coming under pressure due to high leverage. This is the second attempt at a merger between CIMB and RHB in three years, and is in line with the central bank's "2011-2020 Financial Sector Blueprint", which aims for further consolidation. Fitch believes that this will not be an easy merger process - notwithstanding CIMB's experience in dealing with previous acquisitions. Furthermore, weakening credit growth and asset-quality pressures in the overall banking system will not make the process any easier. Combining entities as large as CIMB and RHB will be lengthy, and the addition of MBSB is likely to make the integration even more complex. The inclusion of the smaller building society is surprising, as it has a significantly different business mix with over 70% of gross loans in higher-risk personal unsecured lending - a segment where there are concerns about over-indebtedness. MBSB's small branch presence means it relies on government and corporate deposits, mostly fixed term. It does bring greater scale to CIMB's Islamic banking franchise, although it is unclear if the new group would be able to harness the building society's predominantly domestic, retail operations to further its international Islamic banking aspirations. There would be significant network overlap at the combined entity, with close to 550 branches in Malaysia, compared with 399 at Maybank - currently the largest bank. There may therefore be substantial opportunities for cost improvements in the merged entity. However, 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. Both RHB and MBSB lag the larger Malaysian banks in current and savings account (CASA) deposits, an important source of stable funding. As such, the new entity could be at a funding disadvantage relative to CIMB, owing to a lower proportion of CASA deposits. Fitch estimates 22% of deposits at the merged entity would be CASA on a pro forma basis, much lower than CIMB's current 36%. In addition, CIMB's capitalisation has historically been at the lower end of its peers, and its CET1 ratio was only recently boosted to 9.6% following a capital-raising early this year. As CIMB may have to pay a premium for RHB/MBSB, the merger could result in weaker capitalisation at the new entity relative to CIMB's current position unless pricing discipline is exercised and sufficient high-quality capital is raised. Details are yet to emerge as to how CIMB will address these issues. Beyond the integration challenges, a successful merger would provide a stronger domestic platform from which CIMB's offshore aspirations could continue to expand - in particular its share of regional lending and cross-border trade financing. The merger will also strongly position the new entity to build its shariah-compliant activities as the country's largest Islamic bank. This plays to Bank Negara Malaysia's objectives for the country to become a business gateway to ASEAN markets and a leading international Islamic financial centre. However, competitors may not allow CIMB to remain the dominant lender for long. If successful, the CIMB/RHB/MBSB merger could kick off another round of consolidation as other lenders seek to build scale in the competitive domestic and regional market. Contact: Elaine Koh Director Financial Institutions Tel: +65 6796 7239 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Justin Patrie Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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