NINE months after a failed three-way merger deal, MALAYSIA BUILDING SOCIETY BHD (MBSB) is now in another merger talks with Bank Muamalat Malaysia Bhd.
The expectations of a looming merger has put the spotlight on MBSB and it is turning out to be an interesting time for the company.
Shares in the non-bank financial provider rose 12 sen to RM1.63 in early trade before closing nine sen higher at RM1.60. DRB-HICOM BHD, which owns 70% of Bank Muamalat, added six sen to RM1.39 in active trade as investors were positive about a merger plan between the two institution.
On Thursday, Bank Negara gave its nod to MBSB and Bank Muamalat to begin merger talks, a move that can pave the way for the creation of the country’s biggest standalone Islamic Bank. The combined asset size of the two lenders is estimated to be about RM60bil, latest available figures showed. The assets combined is higher than BIMB HOLDINGS BHD’s asset size of RM54bil as at end-March. BIMB is the holding company of Bank Islam Malaysia Bhd.
MBSB has been given the green light to commence negotiations with shareholders of Bank Muamalat. DRB-HICOM controls 70% of the bank, while the remaining shares are held by Khazanah Nasional Bhd.
Analysts say they were not entirely surprised with the potential merger. StarBiz in July reported, citing sources, that a merger deal between MBSB and Bank Muamalat was on the cards.
Analysts say MBSB’s action has always been closely watched by investors and the industry especially after the enforcement of Financial Services Act 2013 (FSA).
Under the FSA, holding companies that hold more than 50% of financial institutions are to come under the purview of Bank Negara. The FSA as a whole is aimed at bringing about more transparency, accountability and governance and to make sure institutions have sufficient assets to meet their obligations.
Islamic bank in the making
The FSA provides an opportunity for Bank Negara to look at MBSB’s books. MBSB as a non-bank financial provider, is not technically a commercial bank. There will be no more doubts on its asset quality when its books are to be scrutinised by the central bank when it becomes a commercial bank following the merger.
Furthermore, if the deal is done, MBSB can collect deposits under CASA (current account savings account). It will also have access to interbank instruments.
Also, MBSB has yet to venture into trading in interbank instruments, government bonds and current accounts nor has it invested in ATMs. These are readily available under Bank Muamalat.
RHB Research analysts David Chong notes that MBSB has been on the lookout for potential candidates to undertake a corporate exercise. The key criterion is that the potential candidate has to be an Islamic bank and be consistent with MBSB’s plan of turning into a fully-compliant Islamic financial institution within five years.
“MBSB is double the size of Bank Muamalat in terms of total assets and loans. We estimate that the enlarged entity would be the second largest Islamic bank in the country, behind Maybank Islamic,” he says.
Chong points out that the loan mix of both entities is mainly retail-based and Bank Muamalat’s asset quality is better, although loan loss coverage levels are broadly on par.
“We note that the retail deposit base of both entities is low, about 7-8% of total deposits. Thus, the merged entity may need to compete aggressively for retail deposits ahead in order to meet regulatory requirements on liquidity. Also, the CASA ratio for the merged entity is low, at 9%,” he says.
Chong estimates the acquisition could cost MBSB some RM930mil. He explains that for Bank Muamalat financial year ended March 31, 2015, its return on equity (ROE) was 5%.
Among the banks, Affin Holdings has the closest ROE – 2015 forecast of 5.7%, and trades at a 2015 forecast price-to-book value (P/BV) of 0.55 times.
“Ascribing a fair P/BV of 0.5 times, we estimate the acquisition could cost MBSB around RM930mil. Assuming the acquisition is via a share swap with MBSB shares issued at the current share price, we estimate the acquisition could enhance our 2016-2017 forecast net profit by 15-17%, but earnings per share would be diluted by 8-10% while ROE could fall to 11.3-11.5% from 11.5-12% currently,” he says.
Corporate exercise inevitable
MBSB president and chief executive officer Datuk Ahmad Zaini Othman had been previously quoted as saying that a corporate exercise involving the bank was inevitable for the financial institution in an increasingly competitive landscape.
One of MBSB’s setbacks is its inability to tap low-cost funds from the money market that are accessible to conventional banks. It is understood that MBSB would need to migrate to becoming a full-fledged bank in a bid to increase its competitiveness. Without being able to tap into low-cost deposits, MBSB has found it difficult to grow its loan base.
In the second quarter ended June 30, MBSB’s profit fell 63% year-on-year, dragged down by provisions for an impairment loss on loans, advances and financing.
As for Bank Muamalat, its FY15 profit before zakat and taxation of RM122mil was a decline of 41% compared to the RM208.3mil posted in the previous corresponding year. Its 12-month revenue surpassed RM1bil but total net income decreased by 15% to RM519.8mil.
Bank Muamalat, with total assets of over RM22bil, is the country’s second standalone Islamic bank after Bank Islam. MBSB, which is 65% owned by the Employees Provident Fund (EPF), has assets amounting to RM41bil as at end-June.
Assuming the proposed merger goes through, the combined entity’s asset size would be ranked somewhere in between Affin Holdings Bhd (RM64bil) and ALLIANCE FINANCIAL GROUP BHD (RM52bil).
Based on the latest available figures, Affin Hwang Investment Bank analyst Tan Ei Leen says should the merger go through, the new entity will have a combined asset size of about RM60bil, comprising RM41bil from MBSB and RM22bil from Muamalat Bank.
“In our view, the objective of the merger is to enable MBSB to change its business direction and expand as a banking entity,” Tan says, adding that MBSB’s shift in direction to increase its corporate loan exposure to 30% from 13% presently (under its 5-year plan, 2015-2019) could potentially mean significant asset growth, which should also boost its bottom line.
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