AS the dust settles on the aborted three-way banking merger of last month, a plan is being floated on a “marriage” between MALAYSIA BUILDING SOCIETY BHD (MBSB) and Bank Islam Malaysia Bhd.
Sources say the idea of a merger between the two is being mooted at the shareholder level of both companies, namely the Employees Provident Fund (EPF) and Lembaga Tabung Haji (LTH).
According to sources, the interest for both parties to go into a corporate exercise is not altogether new and was first floated early last year. But by the time any formal move could be taken, CIMB GROUP HOLDINGS BHD had already entered the fray to initiate the proposed merger between MBSB and RHB Capital Bhd (RHB Cap). Now, with that out of the way, the plan is apparently being revisited but still at preliminary stages, sources say.
A common factor the two companies have is Tan Sri Samsudin Osman, who is chairman of EPF and BIMB HOLDINGS BHD – Bank Islam’s listed parent company. BIMB wholly owns Bank Islam, which is its main income generator. “Because of their common chairman, the two parties have a close relationship,” say sources.
The EPF is also a shareholder in BIMB with an 8.18% stake as at March 31, 2014, according to the company’s 2013 annual report. The pension fund has in recent years upped its stake in the stock from 4.73% in 2009. BIMB’s single largest shareholder is LTH with 54.69% while another fund, Permodalan Nasional Bhd (PNB), has a 5.11% stake.
The EPF, meanwhile, is MBSB’s single largest shareholder with 64.5%. The fund ended up with the large stake in the non-bank lender due to legacy issues from the 1998 financial crisis. It has been reported that the fund under its current leadership has made it a priority to reduce its interest in listed companies to ensure it remains as an investor and not the driver of the entities.
Bankers say that if a merger is to take place, the EPF would be able to vote, unlike the situation in the failed merger with CIMB and RHB. For funds to be considered a substantial shareholder, their stake has to be at least 10% in a company.
The fund was not allowed to vote in that deal as it is a common major shareholder of all the parties involved and there exists a potential conflict of interest.
Bank Islam, meanwhile, is Malaysia’s first standalone Islamic bank set up in 1983. In the past few years, it has sought several mergers and acquisitions (M&As), but nothing materialised. “Bank Islam is the country’s standard-bearer in Islamic banking. After three decades in the business, it is only expected that it moves into the big league and grow market share,” notes a banker who reckons that Bank Islam would not be able to achieve its ambition to be a mega-Islamic bank unless it merges with another Islamic bank.
Business-wise, Bank Islam is much larger with a strong retail presence of 140 branches and a workforce of about 4,000. MBSB, which built its asset base largely from loans to personal financing, has 43 branches and 1,300 employees. However, it is diversifying and aims to double its corporate loan book to 30% by 2020 under a new five-year business plan.
MBSB’s cost-to-income ratio (CIR) is among the lowest in the industry at 22.36% in 2014, while Bank Islam’s is at about 50%, which is not unusual for a bank with retail presence, say analysts.
Bank Islam’s total assets as at Sept 30, 2014 were RM42.89bil, while MBSB’s is RM37.67bil currently.
Maybank Islamic Bhd, the Islamic banking arm of MALAYAN BANKING BHD, is the biggest Islamic banking outfit with total assets of RM132.30bil.
Bank Islam declined to comment on StarBizWeek’s queries.
Earlier this week, MBSB’s president and chief executive officer Datuk Ahmad Zaini Othman said that a corporate exercise is inevitable for the company in an increasingly competitive landscape. In an interview with StarBizWeek. he said that for the company to get out of this “no man’s land” and to be on firmer growth towards a financial institution platform, it needs to seriously look into a corporate exercise in the very near future.
On the synergies it is seeking from an M&A, Zaini said that it would have to be a marriage between retail and corporate, given that he felt MBSB can contribute more on the latter. Without being able to tap into low-cost deposits, MBSB is also going to find it difficult to grow.
Bank Islam’s managing director Datuk Seri Zukri Samat, in an interview with StarBizWeek last year, said that besides Indonesia, the bank is also aiming to grow its local footprint, in line with the central bank’s goal to have a mega-Islamic bank in Malaysia. As to its M&A options, he had said that the bank was open to candidates that can complement its strengths in consumer banking.
In 2011, Bank Islam failed to strike a merger deal with DRB-HICOM BHD-owned Bank Muamalat Malaysia Bhd. Last year, there were talks that Maybank Islamic could be teaming up with Bank Islam.
“Bank Islam is a prized asset in the pilgrim fund’s stable of companies. However, a stake of 30% to 40% in a much larger entity is an attractive proposition,” says a banker. It is also likely that LTH would want to retain the Bank Islam name post-merger, given that it has a stronger branding and is after all Malaysia’s pioneering Islamic bank.
On valuations MBSB could fetch, some bankers think that it may not be able to fetch the 1.91 price-to-book value (P/BV) as in the previous bank merger deal, as economic conditions have weakened. MBSB could have been accorded a high valuation in that deal because of its high return on equity, say analysts.
Had that proposed merger materialised, it would have seen MBSB being acquired by CIMB-RHB’s Islamic banking operations to form a “mega” Islamic bank with total assets of RM122bil. At Friday’s price of RM2.20, MBSB is valued at RM5.96bil and trading at a P/BV of 1.30. Just last week, MBSB announced a net profit of RM1.02bil for the year ended Dec 31, 2014, bolstered by a one-off recognition of RM366.06mil in deferred tax assets.
As for BIMB, a restructuring may have to be done prior to any merger of Bank Islam, given that the former also owns a 60.5% stake in Syarikat Takaful Malaysia Bhd, which is also listed, and BIMB Securities Sdn Bhd, which make a minute contribution to the group’s bottom line. BIMB shares are valued at RM6.2bil at RM4.04. It had made a pre-tax profit of RM506.27mil for the nine months ended Sept 31, 2014.
On Thursday, BIMB announced that it asking for a time extension to submit its financial results for the fourth quarter ended Dec 31, 2014.