Banks regroup as Malaysian mega-merger collapses

CIMB, RHB Capital and MBSB’s planned $20 billion merger flounders but RHB still wants to bulk up.

CIMB Group, RHB Capital and Malaysia Building Society (MBSB) were mulling their options on Tuesday after their $20 billion mega-merger has collapsed, according to well-placed sources.

Confirmation of the three-way merger’s collapse may come as soon as this week, people familiar with the matter told FinanceAsia.

RHB, which has been an acquisition target several times before in 1998 and 2011, wants to bulk up to preserve its independence and may try to pursue a two-way merger with smaller MBSB once the dust settles, people familiar with the bank’s thinking said. MBSB is pursuing its own banking licence.

Malaysia's Employees Provident Fund (EPF), which owns 65% of MBSB, 41% of RHB and 15% of CIMB, may need to lower its ownership in RHB and MBSB. If CIMB is going to go it alone then it will need to inspire stock market analysts with a new strategy. 

"A number of factors are required to turn our sentiment around on the stock," said CLSA analyst Asheefa Sarangi. These included an updated strategy or radical restructuring and a change in management. 

CIMB's chairman Nazir Razak, who is also brother of Malaysia's Prime Minister Najib Razak, has spearheaded the banks expansion in recent years. He stepped down as CEO earlier this year but has still been a driving force in the deal talks.

Several of the sources FinanceAsia spoke to stressed that no new deals would happen immediately.

“There is a level of fatigue – people need to regroup,” one said. “It is impossible right now to value the banks – it needs a few months for the noise to go out of the share prices,” another noted. 

CIMB, RHB and MBSB first mooted a merger in July. The deal would have created Malaysia’s largest bank with combined assets of RM613.72 billion as of March 31, overtaking Maybank, but disagreement set in as CIMB’s share price began to sag.

CIMB's share price has dropped by around 28% making it too expensive for CIMB to pursue the deal and unattractive for RHB shareholders, who were due to receive CIMB shares in payment. It was also unpalatable to RHB's second-largest shareholder Aabar Investments.

CIMB's share price fell as some investors questioned whether the proposed tie-up would achieve its goals. “The market was sceptical from the start about the quantum and timing of the merger synergies,” said Kuala Lumpur-based Julian Chua, an analyst at Nomura. The Malaysian banks had said that cost savings would drive 86% of the forecast synergies, with a further 14% coming from improvements in revenues.

With CIMB’s share price sliding RHB sought cash as payment instead of shares. (MBSB had a choice of cash or shares already baked into the deal terms). But CIMB declined given its CET1 ratio was just adequate at 9.5%, people familiar with the deal said.  

The deteriorating economic outlook in Indonesia and Malaysia also weighed on the banks’ willingness to seal a deal at valuations set in October, people involved in the talks said. “That’s the problem with long-drawn-out discussions,” one mergers and acquisitions banker said.

The merger’s expected collapse is a blow to Malaysia’s plans to create a megabank that could compete more effectively against the likes of Singapore DBS, Southeast Asia’s largest bank, and global banks such as HSBC, which have been making inroads into Malaysia. Malaysia owns a controlling stake in CIMB, RHB and MBSB. 

Advisers on the deal will also miss out on the fees and league table credits. Credit Suisse was advising RHB, Morgan Stanley and JP Morgan were hired by CIMB and Citi was advising MBSB. Deutsche advised shareholder EPF while Goldman worked for Aabar investments.


The merger ran into obstacles soon after the banks entered into a 90-day exclusivity period in July.

The merger was based on a share swap between CIMB and RHB Capital set in October at an exchange ratio of 1.38, or 1.38 CIMB shares for each RHB share. This is based on a benchmark price of RM7.27 for each CIMB share and RM10.03 for each RHB share, translating into price-to-book ratios as of end-June of 1.7 times and 1.44 times, respectively.

Source: Bloomberg, CLSA

Aabar Investments, which owns 21% of RHB, pushed aggressively for a higher takeout price. It paid about RM12 per RHB share. 

But CIMB has underperformed the broader market by about 17 percentage points in the last three months, giving it less flexibility to improve its offer.

CIMB was de-rated by the market to about 1.2 times its 2014 forecast price-to-book value, basically taking its valuation back to 2008 global financial crisis levels. At that level it traded 35% below its mean P/BV of 1.9x and 25% below the current banking sector average P/BV of 1.6x. 

This slump meant that the deal looked increasingly expensive for CIMB and unattractive for RHB and MBSB’s shareholders. 

“It made sense to the major stakeholders seven months ago. It no longer does,” said a person involved in the negotiations.

The banks had tried to get around Aabar's threat to vote against the deal by restructuring the terms so smaller RHB was the buyer instead of CIMB. RHB only requires 51% shareholder approval to make the reverse merger, as opposed to 75% shareholder approval if acquired. But this plan was foiled when Bursa Malaysia barred EPF from voting due to its conflict of interest given it is a shareholder in all three banks. 

The banks and the Malaysian government, which is keen to see more banking consolidation, finally found a way of appeasing Aabar by helping it on another Malaysian investment, said one person familiar with the talks.
CIMB tried to raise capital from around Asia to push the deal through but it failed to drum up interest from investors, according to one of the people involved in the talks. Also the capital raising was looking increasingly dilutive as its share price slumped.
Another blow to the deal was CIMB’s deteriorating performance in Indonesia which weighed on its third quarter results.

CIMB has a 97.9% stake in Indonesia's CIMB Niaga. CIMB’s ratio of non-performing loans rose to  3.3% from 3.1% in the second quarter, mainly due to a rise in CIMB Niaga’s coal-related exposures. CIMB management guided for NPLs to climb again at CIMB Niaga in the fourth quarter. 

"Amid weak capital markets and ongoing concerns over CIMB Niaga, we expect CIMB’s earnings to be subdued this year," said Desmond Ch'ng, an analyst at Maybank. CIMB's fourth quarter results are due before February 12. 

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