IslamicFinance.de

Weak economic conditions scuppered plans for a tie-up of Malaysia’s CIMB Group Holdings Bhd with RHB Capital Bhd and Malaysia Building Society Bhd (MBSB). It would have created Southeast Asia’s fourth-largest bank with assets of US$190 billion (RM692.63 billion). MBSB, a non-bank lender and the smallest of the three firms, is now studying a plan to convert itself into a full-fledged Islamic lender. It said last week it would convert existing conventional financial products into Islamic ones while introducing new ones to close the gap with competitors. Meanwhile, both CIMB and RHB Capital have established, domestically focused, Islamic units.

The planned amalgamation of CIMB Group Holdings Bhd., RHB Capital Bhd. and Malaysia Building Society Bhd. has stalled as tumbling oil prices wreak havoc on the economy. The merger would have been the nation’s largest ever M&A transaction. Central bank Governor Zeti Akhtar Aziz first raised the idea of an Islamic finance megabank more than five years ago. A license slated to be awarded in 2011 for a multinational lender to be formed between Asia and the Middle East didn’t materialize, depriving the $1.7 trillion global industry of a growth engine. Nevertheless, RHB said in a statement that the parties were still in discussions.

Former finance minister Tun Daim Zainuddin expressed his support for the mega merger of CIMB Group Holdings, RHB Capital Bhd and Malaysia Building Society Bhd, saying when he was in office, he suggested that Malaysia only needs four banks. Banks need a large capital base to compete globally and this could be achieved through mergers, said Daim. Moreover, Daim said that he was confident that the Vision 2020 would be achieved, with proper planning and hard work. However, he said, a high income nation need not necessarily mean a developed nation. In order to become the latter, the country needs to prioritise quality education and technological advancements.

The creation of a mega Islamic bank will push Malaysian banks to look beyond local shores should the proposed merger of CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd materialise. While the local market for Islamic finance remains lucrative, banks should not be content to remain in the local market as a market downturn could cause a reversal of fortunes. Low risk tolerance is why local banks are not expanding their reach overseas. Some attempts thus far to go abroad have been on a partnership basis contributing knowledge and technical expertise. In addition, local banks’ issuance of Islamic sukuk in the international arena is still low relative to international banks.

The Employees Provident Fund (EPF) stressed it has the right to vote on the proposed merger between RHB Capital Bhd (RHBCap) and CIMB Group Holdings Bhd as it is the major shareholders of both entities. The pension fund’s chief executive officer Datuk Shahril Ridza Ridzuan reminded that it has the interests of 14 million members at stake. Some within the board of RHBCap were against allowing the pension fund to vote in the merger deal. The dissented parties thought that it was “inconceivable” that the EPF had not been engaged in prior discussions relating to the proposed merger between RHBCap and CIMB in which the pension fund holds a 41.34% and 14.46% stake respectively.

The creation of a mega Islamic bank must fulfill the objectives of being able to undertake international business and facilitate cross border financial flows, said Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz. She said that such a mega bank must also be able to support international trade and cross border investment activity. She was responding to a question about the license for the proposed mega Islamic bank as a result of a merger between CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd. Dr Zeti said Bank Negara wanted to see the internationalisation and enhancement of Malaysia’s financial and economic connectivity with other countries.

Fitch Ratings has warned that a merger plan by Malaysia’s second largest bank CIMB Group with RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) to create the country’s biggest lender is fraught with risks. Fitch said the merger could weaken capital buffers for CIMB if not funded by sufficient new equity, adding that any move to rationalise branches and staff could be “politically unpalatable”. Furthermore, weakening credit growth and asset-quality pressures in the overall banking system will not make the process any easier. On the other hand, a successful merger would provide a stronger domestic platform from which CIMB’s offshore aspirations could continue to expand.

CIMB Group Holdings Bhd, RHB Capital and Malaysia Building Society (MBSB) have received Bank Negara Malaysia's approval to start merger talks which would result in the creation of a mega Islamic bank. They announced in a joint statement on Thursday that under the corporate exercise, the proposal was to merge the businesses of both RHB and CIMB. The corporate exercise included plans to create an enlarged Islamic banking franchise with MBSB. The three parties have entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure, and other relevant terms and conditions for a proposed merger.

In the possible merger between Malaysia Building Society Bhd (MBSB) and RHB Capital Bhd (RHBCap), MBSB president and chief executive officer Datuk Ahmad Zaini Othman said MBSB is capable of taking over RHB Islamic. MBSB itself has more than RM30 billion in assets a shareholders' fund of more than RM2 billion and a market capitalisation of RM5 billion on Bursa Malaysia. One option for MBSB is therefore to take over RHB Islamic's RM4 billion assets. Employees Provident Fund (EPF) chief executive officer Datuk Shahril Ridza Ridzuan had said last month that it will let RHBCap and MBSB decide on possible merger plans. The EPF holds a 44.84 per cent stake in RHBCap and 65.5 per cent share in MBSB. Meanwhile, MBSB chairman Tan Sri Abdul Halim Ali said the board of directors is unaware of any plans, is not in talks and has not received any proposals by the shareholders to merge with RHBCap.