Mergers and acquisitions are common in the banking scene ever since Bank Negara Malaysia initated a consolidation protocol back in the late 90’s in hopes of achieving a more effective and competitive banking system.

Merging in today’s economic climate makes sense from a competitive point of view.

Latest statistics on the banking sector indicate a price competition ahead for banks amidst moderating loans growth, net interest margins compression likely to continue, and average lending rates and liquidity fall.

Researchers with Kenanga Investment Bank Bhd (Kenanga Research) maintained its view of moderate loans growth ahead as it will be dragged by the household segment.

This is underpinned by weak consumer sentiments coupled with banks being cautious/selective on asset quality as approval rates are still tight.

“We view the slump in business loan applications with tight business approvals as a temporary blip and likely to reverse the trend ahead,” it said in a sector report earlier this month.

“We view stiff-priced competition trending upwards as the fight for both loans and deposits intensified for higher liquidity and longer-term funding.

“Together with higher impairments and elevated credit costs (coming from inflationary pressures), there are limited catalyst to drive earnings growth for the industry materially beyond our current expectation of a mid-to-high single-digit growth.

“Returns are still decent for the banking stocks in our universe. Hence, we have ‘market perform’ calls for most of the banking stocks.”

Searching for synergies

Thus, it makes sense that banks and financial institutions eye M&As as a quick way to expand and grow.

Several efforts to merge have come and gone over the years, the biggest being the one between CIMB Group Holdings Bhd (CIMB), RHB Capital Bhd (RHB) and Malaysia Building Society Bhd (MBSB) two years ago.

Confirmation came through on January 14, 2015 that the three-way merger of banks in Malaysia has been cancelled, citing a lack of value-creating transactions for all parties involved.

The merger of CIMB, RHB and MBSB would have created a bank with assets exceeding US$175 billion and the world’s largest Islamic bank.

Reports confirm that the banks were not confident that they could achieve the necessary efficiencies and improvements expect by the markets in current economic conditions.

Tengku Dato?Zafrul Tengku Abdul Aziz, acting group chief executive of CIMB Group was quoted as saying e had thoroughly deliberated the merger, and whilst we remain convinced that the combination of our 3 franchises follows sound strategic logic, we ultimately were not able to arrive at a value creating transaction for all stakeholders.

“The decision to cease discussions was arrived at after a detailed review of potential synergies that could be realistically delivered, especially in the current economic environment”.

This has not stopped MBSB, though, as the bank earlier this week submitted an application to Bank Negara Malaysia (BNM) seeking approval to hold merger talks with Asian Finance Bank Bhd (AFB).

he board of directors of MBSB wishes to announce that the company had, on June 19, 2017, submitted an application to BNM to seek the approvals of BNM and/ or the  Ministry of Finance for the proposed merger,?MBSB said in a June 19 filing to Bursa Malaysia.

AFB was backed by a consortium of shareholders from leading West Asian investors ?Qatar Islamic Bank (66.67 per cent), RUSD Investment Bank (16.67 per cent), Tadhamon International Islamic Bank (10 per cent) and Financial Assets Bahrain WLL (6.67 per cent).

List of banks in Malaysia by market capitalisation (SOURCE: AffinHwang Capital)

Merged entity will be systemically important

But perhaps the union everyone is eyeing is between RHB Bank Bhd (RHB Bank) and AMMB Holdings Bhd (AmBank), creating Malaysia’s fourth largest domestic entity and the ninth largest in Asean in terms of assets.

The proposed merger between RHB Bank Bhd and AmBank results in a combined entity with an asset size of RM368 billion and a 14 per cent market share of domestic deposits, will become a systemically-important entity.

In a statement, RAM Rating Services Bhd said the entity would be the fourth-largest among Malaysian banking groups, the market leader in asset management, stockbroking (by trading value) and general insurance (excluding takaful), as well as, the second-biggest player in Islamic banking.

“By assets, the merged entity will be almost 70 per cent larger than the next biggest player,” the ratings agency said.

AMMB’s sizeable general insurance operations would benefit the merged entity’s non-interest income, it said. However, there would still be some overlaps in the businesses of these two banking groups, which might render difficulty in revenue synergy.

On June 1,2017, RHB and AMMB jointly announced that they had, pursuant to Bank Negara Malaysia’s approval, entered into an exclusivity agreement to negotiate and finalise the terms and conditions for a proposed merger.

The exclusivity agreement would be valid until Aug 30,2017 and would be automatically extended upon a submission made to the central bank.

Thus begs the question: How will it come to play? Who will gain more, RHB of AMMB? What will this merger hold for consumers?

Merger necessary to propel growth?

How necessary is a merger to propel growth? AllianceDBS Research Sdn Bhd (AllianceDBS Research) said the RHB-AMMB one – with a transaction priced at one times ite book value – will minimise any goodwill issues that will arise from the acquisition.

“By acquiring the assets and liabilities of AMMB, an extraordinary general meeting will be required at both AMMB (75 per cent of votes needed) and RHB (50 per cent + 1 vote needed) for the transaction to go through,” it said in another note.

As for whether the other key stakeholders can vote, RHB stated that it will need to check with Bursa.

“The exclusivity agreement is for three months (up to August 30, 2017) and will be automatically renewed if necessary,” it said, adding that necessary approvals will also need to be sought from relevant regulators such as BNM, Bursa Malaysia and the Securities Commission.

With no further details on the proposed merger, there is little that AllianceDBS Research can conclude on the extent of revenues and cost synergies to be expected.

“We can at best view this proposed merger as neutral.

Apart from size, it would appear that the merged entity would need to extract a lot of cost synergies.

“To start with, its domestic branch network – whereby RHB has 208 branches nationwide while AMMB has 175 branches – staff and possible overlap in businesses would need to be assessed.

“The merger would bring the enlarged entity’s position to be first for asset management, general insurance, equity broking; and second for Islamic banking.” Meanwhile, MIDF Research believed that by centsolidifying its position, the merged entity will be able to consolidate its operations and product offerings.

This may lay the platform for the merged entity take advantage of any revenue synergies that the larger organisational platform can attain and initiate better growth momentum more akin to its peers.

“However, we foresee that additional investment, such as for restructuring, systems and techonology, will have to be made to streamline both entities into a single group,” it stated.

“All things considered, we are positive on the proposed merger as it will create a stronger banking group, which we believe will be able to compete with its peers more effectively.

(SOURCE: AffinHwang Capital)

(SOURCE: AffinHwang Capital)

We also estimate that it will be beneficial to shareholders.

“However, details are still scarce and we still do not know on key terms such as the pricing, which may hinder the deal.”

Merger to benefit AmBank more?

The proposed merger between RHB Bank Bhd and AMMB Holdings Bhd is expected to benefit AmBank group more than RHB,says the latest Moody’s Credit Outlook.

The rating agency said the proposed merger was credit positive for AmBank (M) Bhd, AmBank Group’s main operating bank, because its distribution, funding resources and systemic importance would benefit from being part of a larger Malaysian banking group.

“On a standalone credit basis, AmBank’s funding profile is weaker than that of RHB.

“AmBank has a materially smaller market share of domestic deposits and lower percentage of low-cost current and savings account deposits in its deposit mix than RHB.

“We expect the merged entity’s funding profile to be closer to that of RHB, and to gain from the larger scale of their combined and enhanced branch and customer network,” it said.

Moody’s said potential benefits to RHB are discounted by its likely operating challenges to rationalise the organisation structure and infrastructure of the newly-merged entity.

“RHB’s integration of OSK Investment Bank Group and other mergers involving Malaysian banks suggest significant challenges, with the realisation of revenue and cost synergies occurring many years after integration.

“In this case, revenue benefits will likely materialise only after the merged entity incurs substantial restructuring expenses,” it added.

Even as Malaysia’s fourth-largest financial group by assets, with a total consolidated assets of RM368 billion, based on March 2017 financials, Moody’s did not expect the merged entity to be in a significantly stronger strategic position relative to the top three Malaysian banking groups – Maybank, CIMB Bank and Public Bank.

However, it said the merger would still enhance the scale of RHB’s operations in Malaysia and give it access to customer and product segments with which AmBank Group has stronger ties, such as the higher-yielding auto-finance segment, investment banking and general insurance.

“The combined total assets of both AmBank Group and RHB would increase RHB’s assets by 1.6 times and AmBank Group’s assets by 2.7 times, based on March 31, 2017 figures.

“The merged entity would solidify its position as having among the largest branch networks in Malaysia, close to that of Maybank, which remains the country’s largest banking group in terms of banking assets, loans and deposits,” it added.

Valuation remains key to successful merger With RHB being the acquirer, analysts at Kenanga Researc) are keeping a tight watch on further updates as to how the deal will come through, especially for its shareholders.

“From the short briefing, we understand that the acquirer is RHB Bank and the acquisition is likely involving a share swap with no cash involved.

“In other words, the transaction will effectively be an all shares merger,” it said in a report on the merger.

Based on Kenanga Research’s understanding, the acquisition price tag targeted or share swap will be done based on a one times price to book value for AmBank. The value for RHB Bank is yet to be ascertained, it said.

Based on RHB Bank’s FY16 and AmBank’s FY17 numbers and at a one times PB acquisition, the research house’s rough estimation of the new entity are;

1. Earnings per share (EPS) of the new entity will be three per cent higher than RHB Bank,

2. Return on equity (ROE) will be lower by 60bps to 8.3 per cent, and

3.CET1 and cummulative annual returns (CAR) of the enlarged entity is expected to rise by 300 basis points (bps) and 130bps to 14.6 per cent and 16.4 per cent, respectively.

Kenanga Research said that this will make its ROE superior from CIMB (7.5 per cent) but lower than Maybank and Public Bank at 10.4 per cent and 15.2 per cent, respectively.

“Its CAR will make it second after Maybank at 19.0 per cent but superior in CET1 (14.6 per cent versus Maybank’s 14per cent),” it added.

New shareholding structure

As for post-acquisition shareholding structure, the Employee’s Provident Fund (EPF) is poised to become the largest shareholder of the newly merged group with a 29.2 per cent stake, followed by Aabar at 10.2 per cent, ANZ at 10.1 per cent and OSK at 4.5 per cent.

MIDF Amanah Investment Bank Bhd (MIDF Research) believe that this proposed merger is a logical step for both RHB and AMMB, as at present, both groups face difficulties in generating solid growth.

“This was evident by its performance in the previous quarters,” it said in a separate report.

“We believe that this merger will propel the merged entities of the Group and AMMB to a strong no. 4 position in terms of asset size.

“With the merger being on an all share basis, there potentially will be a dilutive effect to current shareholders.” However, based on MIDF Research’s estimation, shareholders of both entities will potentially hold shares of higher value.

“This does not include the fact of the potential impact of earnings accretion, higher interest on the share and better valuation.” On this point, AllianceDBS Research said that the market has been aware that major shareholders of AMMB as well as RHB may be looking to exit.

“It is also no secret that Australia’s ANZ Bank – which owns 23.8 per cent stake in AMMB – has been looking to exit from AMMB.

“In May 2016, ANZ wrote down its investment in AMMB to 0.9 times book value, which fuelled speculation that ANZ might be willing to relinquish its stake in AMMB for as low as one time book value.

“Separately, AMMB’s Chairman, Tan Sri Azman Hashim is also known to be open to a divestment of his 13 per cent stake in AMMB.

Aabar Investments PJS (Aabar) could also be looking to exit if the deal is attractive enough.

“There is also OSK’s 10.1 per cent stake in RHB, who may or may not stay on as a shareholder.” Based on its estimates, AllianceDBS Research said this will result in RHB’s enlarged entity suffering from a 3.5 per cent EPS dilution while ROE will be slightly diluted by circa 30bps.

Concerns for consumers

However, a major shareholder impacted by this business move are consumers of RHB and AmBank.

How will the combinstion of two large banking entities – and the side decisions itio

Several unions and industry leaders have spoken up about how this merger will not be in the best interests of said users.

For one, the Sarawak Bank Employees Union and Malaysian Trades Union Congress (MTUC) Sarawak Branch in a joint statement said the RHB-AMMB merger is not in the best interests of consumers and businesses.

The unions in a June 9 statement said it was concerned on this move as it will have an adverse impact in terms of competitiveness.

“We believe that the merger will not be in the interest of consumers and businesses, especially small business as it will reduce competition,” said Law Kiat Min, General Secretary, SBEU general secretary and also MTUC Sarawak asisstant secretary.

“The Competition Commission must look into the adverse impact of the merger on competition.”

Large banks with major market share can become too big to fail, Law said, and the government may be forced to bail them out to avoid consequent economic disruptions and the cost to taxpayers will be significant.

“Such big banks might be even encouraged to take greater risk, knowing that the government would be likely to bail it out,” he stated.

“There is no real efficiency/cost savings from the merger. If anything, the real benefit is from the rationalisation of duplicating branches and cutting staff to make money,” he added in the statement. “We expect thousands of jobs to be affected by the merger exercise.

Particularly, consumers in rural areas will be specifically impacted as there is still a need to have small banks that understand the local conditions and able to serve the particular need of small business and depositors.

He said in most countries, small banks are flourishing and are offering a veryimportant alternative to the bigger international banks. Small banks have a higher proportion of their assets in loans to small businesses than larger banks.

“Already we have seen big banks closing down branches in small rural towns and move them to high-density urban areas.

“RHB Bank has just closed down three branches in Sarawak in Sri Aman, Kapit and Marudi late last year, leaving customers and businesses in those areas high and dry. If this goes on, very soon the rural areas will not have any bank branches.

“We believe that such mergers will make access to banking much harder and more expensive for small businesses and consumers.”

Thousands may lose jobs in merger move

Meanwhile, two economists have warned that the merger could see thousands losing their jobs and unable to gain new employment.

Yeah Kim Leng, a professor at Sunway University Business School, said job cuts under the current economic climate would cause problems to those laid off.

“Even though the economy is improving, it is not at a rate that can generate sufficient employment. There will be job challenges,” he said in an interview with Free Malaysia Today.

However, both Yeah and Hoo Kee Ping, an author of several books on economics, said most of the affected workers could be retrained and reassigned to perform sales and online banking operations.

Hoo noted that tellers and other counter operators made up the majority of bank workers.

“But there is a need for a sales force in banks,” he said to FMT. “Most banks are now training their tellers to do sales.”

He urged the two banks to likewise train the affected workers for sales jobs or to offer them voluntary separation schemes that would be good enough to give them the means to invest in learning new skills.

He also said the workers could be retrained to work in new growth sectors with strong potential, such as financial technology (FinTech), online banking, wealth management and banking insurance investment.

Hoo said banks were already closing down branches in favour of online banking and were focusing their resources on FinTech. He added that more banks were expected to shed jobs in the years to come as they venture into FinTech.

He suggested that RHB and AmBank focus on the non-interest growth sector to reduce redundancies. This sector covers sales, online services and wealth and asset management.

He also said it might not be necessary for RHB and AmBank to cut a large number of jobs if they decided to leverage on the skills and competence their employees had acquired.

“The new entity could focus on retail, corporate lending, private wealth management or Islamic banking,” he said, adding that it could also consider expanding its Islamic banking services overseas.