Government-instigated bank mergers have long been a feature of post-crisis Malaysia. But in what is being described as the first 'commercially-driven' bank merger since 1998, AMMB and EON are close to finalising details of a deal that will create the country's third largest bank. And in an era when consumer lending is king, the bank will have the largest retail loan portfolio in Malaysia.
Full details of the deal will be released late Friday, but one aspect of the deal will please the government - even if it has not instigated this particular deal. That is the fact that the controlling shareholder of AMMB, Tan Sri Datuk Azman Hashim will sell down his stake from 38% to something like 20% in the merged entity.
The Malaysian authorities have made it clear that they prefer major financial institutions to be owned by institutional shareholders and minority shareholders rather than individuals. Kuala Lumpur's closest thing to John Pierpoint Morgan, Rashid Hussain experienced the brunt of this and recently exited the banking empire he created, RHB.
Azman is not exiting, however, and will remain executive chairman of the proposed merged entity, but he will take cash out of the deal and will be at the helm of an institution that will overwhelmingly be owned by minority shareholders. Indeed, minorities are likely to own 80% of the new entity's equity.
Hashim has been involved in banking since 1960, and joined Bank Negara Malaysia and subsequently the board of Maybank in 1966. He was its executive director from 1971 to 1980, and was appointed executive chairman of Kwong Yik Bank (now RHB Bank) in 1980 till 1982 when he became chairman of his current group.
The merged entity will be the third most profitable bank in Malaysia, with net income of around M$600 million ($157 million), and a total asset size of M$87 billion. Its combined loan book of M$59 billion will be the second largest in Malaysia after Maybank and bigger than CommerceAsset (M$49 billion) and RHB (M$42 billion). Maybank, however, will remain the largest banking group by far with total assets of M$161 billion.
Should the merger go through, the plan is to rebrand the new entity rather than keep either of the old names AmBank or EON.
EON grew out of the car business, being the old car financing business of national car maker, Proton. After the crisis it was spun off and during the rounds of bank mergers managed to become an "anchor bank". It has 91 bank branches and 50 finance branches.
This is not its first merger attempt and it has been looking to merge and gain scale for quite a while.
For AMMB this merger gives it a chance to vault its way into the big league, especially from a portfolio manager's point of view. The bank currently trades on one times book value, a rating that doesn't exactly reflect an enormous degree of institutional investor zeal.
It has 24 bank branches and 191 finance branches and the deal will create synergies on the consumer finance front.
More importantly with the dilution of the Hashim vehicle, AmCorp the new entity will be in a stronger position to attract more institutional money into a larger, more liquid entity. That entity will also find it easier to access the capital markets to fund future growth. And as UBSW puts it in a research report on the merger: "Size does matter. With liberalization around the corner, we believe AMMB must be well positioned to remain relevant within the industry. This merger, which would propel it to become the third largest banking group, offers it this advantage. Also, AMMB would remain relevant to institutional investors, especially foreign funds. This could potentially result in a valuation re-rating."
ING, which has worked with EON on several earlier deals, is advising on the transaction, although IFAs have not yet been appointed.