By Ranjit Singh

PRIME Minister Muhyiddin Yassin took the market by surprise when he named former group CEO of CIMB Group Holdings Bhd Tengku Datuk Seri Zafrul Tengku Aziz as finance minister on March 9. All eyes will be on what he will do to address the financial state of the nation given the challenges faced.

Will he push for the local banks to merge? Recall in 2014, CIMB Group, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) announced an intention to merge. The three financial institutions decided to call off the deal six months after the announcement, citing unfavourable economic conditions and the inability to “arrive at a value-creating transaction for all stakeholders”.

Is there hope that such merger talks will be revived now that Tengku Zafrul is helming the Finance Ministry?

The last time that the Malaysian banking sector witnessed a major shake-up in terms of mergers was in 2001 when 54 financial institutions were merged into 10 anchor banking groups post the Asian financial crisis of 1997.

The banking sector is once again facing major challenges and this could result in some consolidation exercises. Digital disruption may make the case for a leaner banking sector as conventional banking outgrows its functionality.

Bank Islam Bhd chief economist Dr Afzanizam Abdul Rashid told FocusM that the possibility of banking mergers could not be discounted in the present scheme of things.

“The banking industry landscape is always changing and very competitive. The emergence of fintech and further democratisation of financial services amid an increase in regulatory costs would somehow make the M&A (merger and acquisition) option look compelling,” said Afzanizam.

He also said cost containment and revenue enhancement have always been the key consideration in order to stay ahead of the curve and to deliver value to the shareholders.

“However, it is also believed that there is no one-size-fits-all solution. There is always room to become a niche bank that would serve its purpose and be able to give respectable returns to the shareholders,” added Afzanizam.

An interesting point that was brought up by Afzanizam was that in the context of digitalisation, banks may consider weighing the option of forging strategic alliances or joint ventures with non-banks that can complement their businesses instead of M&As with other banks.

Malaysia Rating Corp Bhd (MARC) in a banking sector report said that besides charting out internal growth strategies, banks may be carrying out rationalisation and consolidation activities that will increase their scale and potentially reduce overall cost in the long run.

MARC said although consolidation was not an immediate necessity, given Malaysian banks’ resilient performance last year, mergers would enhance the scale of a bank’s operations that may provide better synergies in operations and cost efficiencies.

However, the main consideration in any banking merger would be pricing and valuations.

A major motive for bank M&As is to maximise shareholder value. This is accomplished by increasing a bank’s market power, efficiency and risk diversification.

The last banking merger to take place in Malaysia was between MBSB and Asian Finance Bank in February 2018. The planned merger between Al-Rajhi Bank and MIDF Bhd was aborted early this year as the parties could not agree with their terms of the deal.

DFI merger

Another mega merger that is taking place is between the development financial institutions (DFIs).

The government, in Budget 2020, proposed that Bank Pembangunan Malaysia Bhd (BPMB), Danajamin Nasional Bhd, Export-Import Bank of Malaysia Bhd (Exim Bank) and Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank) would be restructured and merged to strengthen the DFI eco-system.

It is assumed that the merger between the four DFIs is intended to create a better-run entity as opposed to their current high non-performing loans and corporate governance issues environment.

Bank Negara Malaysia had in December 2019 given its approval to BPMB and Danajamin to commence negotiation for the first phase of the plan. Under the proposed structure, Danajamin will become a wholly-owned subsidiary of BPMB.

BPMB said it was conducting the necessary due diligence process, with the target operational effective date for Phase 1 completion by the fourth quarter of 2020, subject to shareholder and regulatory approvals.

The bank and Danajamin were reviewing their business strategies to expand their scope of business in providing a wider range of products and services, and greater value proposition to customers, it added.

The second phase will involve the merger of Exim Bank and SME Bank with the enlarged BPMB.

SME Bank, as its name suggests, focuses on small and medium enterprises while Exim Bank’s business hinges on the export and import of goods.
In its financial year ended Dec 31, 2018 (FY18), BPMB posted a net profit of RM167.31 mil, down from RM213.31 mil in FY17.

In FY18, BPMB’s gross impaired loans, financing and advances as a percentage of gross loans, financing and advances improved to 10.95% from 12.15% in FY17 and 15.02% in FY16. Nevertheless, the figure is still high compared with that of commercial banks, where it is largely below 3%.

According to its 2018 annual report, SME Bank, which at one time was part of BPMB, suffered a net loss of RM556.13 mil that year, which is attributed to the Malaysian Financial Reporting Standard 9 requirement.

In FY17, it registered a net profit of RM63.77 mil while its gross impaired loans amounted to more than RM2 bil and net impaired loans, advances and financing as a percentage stood at a high 13.21%.

Exim Bank made a net profit of RM270.4 mil in FY18 while its net impaired loans stood at 10.34%.

Danajamin, meanwhile, registered a net profit of RM119.2 mil in FY18, down marginally from RM114.18 mil in the previous year.

The four entities collectively had a net profit in excess of RM620 mil (for SME Bank, its FY17 numbers were used).

The three DFIs would also have a strong asset base when merged. In FY18, BPMB had total assets of RM24.73 bil while its total liabilities stood at RM17.18 bil. Exim Bank had total assets of RM11.99 bil versus RM9.95 bil liabilities.

SME Bank, meanwhile, had total assets of RM9.72 bil and total liabilities of RM8.45 bil. Collectively, their assets were valued to be more than RM46 bil.

At the time of writing, it is not clear who will lead the merged entity. More importantly, can Tengku Zafrul ensure it will not turn out to be one big inefficient behemoth?

The banking sector merger will require the acquiescence of the government and it remains to be seen if the newly minted finance minister has what it takes to ensure such mergers are successful and would be beneficial to the country. – March 11, 2020