The planned merger between CIMB Group, RHB Capital and Malaysia Building Society’s (MBSB) would create a banking colossus in Malaysia but might also struggle with extensive duplication of branches and people, according to banking analysts.
CIMB, RHB and MBSB said in a statement on Thursday that they had won approval from Bank Negara Malaysia to start talks to merge the businesses of RHB and CIMB as well as create an enlarged Islamic Banking franchise with MBSB.
There have been persistent rumours of a change in ownership at RHB ever since Malaysia’s Employees Provident Fund (EPF) acquired an 82% stake in the bank in 2007. CIMB and Maybank tried and failed, separately, to acquire RHB in 2011.
However, news of the potential three-way merger was unexpected.
“CIMB’s involvement in a possible merger with RHB Cap and MBSB is a total surprise to us,” AmResearch’s analyst Rachel Huang said.
The three parties have entered into a 90-day exclusivity agreement to negotiate and finalise the pricing and structure of the deal and the creation of an Islamic bank. The agreement comes with an automatic extension provision upon submission to Bank Negara Malaysia.
"There is a prima facie case for a value-creating merger between the three entities and we want to get into detailed discussions to validate it," said Nazir Razak, CIMB’s group chief executive and the brother of Malaysia's prime minister.
CIMB, RHB and MBSB shares will resume trading on Bursa Malaysia on July 11 after a suspension at their request on Thursday.
Birth of a banking giant
If the merger goes ahead the newly created entity would have a dominant position in terms of domestic loans and deposits, which would give it increased pricing power in a crowded banking market.
For instance, AmResearch estimated CIMB’s market share of domestic loans would rise to 25.5% from 13.8%, way larger than Maybank’s 17.9%. CIMB’s share of deposits would jump to 23.9% from 12.7% presently, ahead of Maybank’s 16.8%.
It would also overtake Maybank in terms of market capitalisation and could count on the backing of strong institutional shareholders: namely EPF and the country’s largest sovereign wealth fund, Khazanah.
However, the three-way merger is likely to create significant duplication between CIMB and RHB in the bank’s commercial banking and investment banking operations.
UBS banking analyst Chris Oh noted that the combined entity would have a branch network of 562, compared with 399 at Maybank and a staff force of 57,500 versus 47,000 at Maybank. It is unclear if the banking regulator would allow the overlap to be eliminated by closures and layoffs.
Banking analysts said they were taken aback by reports that CIMB, as part of the merger, would issue shares at $M7.56 apiece, which is 1.75 times its book value as at the end of the first fiscal quarter. AmResearch’s Huang, for one, initially pencilled in that the new CIMB shares would be issued at $M7.24 each.
UBS's Oh noted that RHB would need to secure a favourable share exchange to placate shareholders such as Aabar Investments and Tan Sri Ong.
The merger news follows hot on the heels of Nazir's decision to step down from his role as chief executive to become chairman.
After a discussion with Nazir, JP Morgan said in a report that the key idea of the management shakeup “is to broaden the leadership role from one to two individuals.” JP Morgan added that Nazir will still lead the strategic direction of the group but that overseeing the day-to-day operations will be the incoming CEO’s role.
JP Morgan voiced its confidence in such an arrangement based partly Nazir's efficient and timely integration of Bank Niaga between 2008 and 2009.
Nazir has transformed CIMB over the past decade from a small investment bank in Kuala Lumpur to one with an extensive commercial and retail franchise across the Association of Southeast Asian Nations.
Most recently CIMB — also Asia’s fifth-largest bank by assets — boosted its regional operations and expanded its investment banking capabilities by acquiring parts of Royal Bank of Scotland’s Asia operations ex-Japan, including its regional equities business. The purchase was completed in 2013.