Fitch: Mega bank merger will spur more banking deals in Malaysia

The combination of MBSB, CIMB Islamic and RHB Islamic could enable the new bank to expand its Islamic banking busi ness across borders, and help attract foreign strategic investors.

PETALING JAYA: Fitch Ratings believes that the mega bank merger between CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) will spur further consolidation in the Malaysian banking sector.

While no other proposed deals have been suggested as yet, Fitch said additional tie-ups would be in line with Bank Negara’s Financial Sector Blueprint to build larger and more efficient Malaysian financial institutions that are better capable of competing in the wider region.

“The merger remains subject to the approval of the regulatory authorities and the respective shareholders of CIMB and RHB, with completion expected in mid-2015.

“A successful transaction will produce a top five Asean bank, which would be in a better position to grow regionally with the larger scale of its domestic operations,” it said in a statement.

The planned creation of a new “mega Islamic banking entity”, based on the combination of MBSB, CIMB Islamic and RHB Islamic, could enable the new bank to expand its Islamic banking business across borders, and help attract foreign strategic investors.

Fitch added that the Oct 9 announcement of the in-principal agreed terms of a proposed merger between the banks provides some additional clarity as to how they will address some of the challenges associated with the tie-up.

While the merger will not necessarily lead to downward pressures on CIMB’s credit profile, Fitch will continue to highlight integration challenges and potential asset-quality weaknesses linked to the inclusion of MBSB in the new entity.

Unsecured personal lending makes up the bulk of MBSB’s loan portfolio. However, the overall impact on the merged entity’s loan quality should be relatively limited, as MBSB will only make up around 8% of the overall loan portfolio of the newly merged entity.

The announcement covered the basic terms of the deal, including pricing and structure.

Fitch said the impact on common equity tier 1 (CET1) capital is likely to be limited, as the transaction between CIMB and RHB will be done via a share swap.

“On a pro forma basis, the new banking group’s CET1 capital is estimated by Fitch to be around 9%, down from 9.5% as reported by CIMB Group at end-June 2014.

“Management has highlighted the target of 9.5%, and may look to replenish capital if the ratio falls below 9.0% - potentially through asset disposals,” it said.

If the deal goes through, cost synergies are likely to materialise only over the long term, it added.

“CIMB has a track record in managing earlier acquisitions, although the successful execution for this proposed merger remains uncertain - given the larger scale of the transaction,” it said.