IT has been over four months since Malaysia Building Society Bhd (MBSB) sought Bank Negara Malaysia’s approval to acquire Malaysian Industrial Development Finance Bhd (MIDF). With no developments since then, many in the market are wondering whether the deal, which would result in the first bank merger in over five years, is still on.

According to several sources that The Edge spoke to, there has been no change in the plan to merge. “It’s taking a little longer than expected, but it’s still on. It (the proposal) is still with Bank Negara,” one says.

Assuming Bank Negara greenlights the deal, Main Market-listed MBSB’s next course of action would be to hold an extraordinary general meeting to seek shareholder approval. It is understood that the parties involved in the deal now expect the acquisition to be completed in the first half of the year instead of the first quarter. “I think it’ll probably move to the first half now, so it’s a slight delay from [what the parties initially expected],” the source says.

MBSB is 65.87% owned by the Employees Provident Fund (EPF) while MIDF, a development finance institution, is wholly owned by Permodalan Nasional Bhd (PNB).

In a stock exchange filing on Oct 21 last year, MBSB announced it had made an application to Bank Negara seeking approval for its acquisition of MIDF from PNB to form a universal Islamic banking group.

Less than three months later, on Jan 12, MBSB chairman Tan Sri Azlan Zainol — said to be a key figure driving the planned merger — passed away.

“I don’t believe there’s anything to suggest that Bank Negara might have concerns [about the deal]. I think they may just be clarifying a few things with MBSB [as the acquirer] on the holding structure and so on,” an industry source opines, when asked why Bank Negara is taking longer than expected to give its blessing for the deal.

The source adds: “Recall that MBSB has just come off a previous M&A exercise in 2018. We are not privy to what conditions BNM might have imposed on them during that time and how those conditions now sit with whatever is being proposed now. I suspect that’s where the discussions are. As long as MBSB is able to offer satisfactory answers, it shouldn’t be a problem.”

The last bank merger in Malaysia was back in November 2017, when MBSB, a non-bank lender at the time, agreed to acquire foreign-owned Asian Finance Bank Bhd for RM645 million in a cash-and-shares deal in a bid to clinch the latter’s Islamic banking licence. The acquisition was completed in February 2018.

Following that, MBSB became the financial holding company (FHC) of MBSB Bank (the merged Islamic banking entity), which housed all the group’s Islamic assets and liabilities. A relatively small amount of conventional non-performing loans was parked at the FHC.

In an interview with The Edge three years ago, MBSB’s then president and CEO Datuk Seri Ahmad Zaini Othman shared that Bank Negara had given the FHC three years until April 2021 to address some RM1 billion worth of conventional non-performing assets. “Those assets that can be converted into Islamic and are performing will be brought down to MBSB Bank, but those that can’t will be sold off,” he said.

As at end-2022, MBSB had total assets of RM54.95 billion, of which RM53.68 billion were Islamic.

A complementary merger

While MBSB has not provided details of its proposed merger with MIDF, it is widely known that it will be effected entirely via a share swap. Market talk has it that the deal values MIDF at less than its one-time book value.

The EPF is expected to emerge as the single-largest shareholder in the merged entity, with PNB holding less than 20%, The Edge previously reported, citing a source familiar with the plan.

The merger is seen as complementary from a business standpoint. MBSB is mainly a consumer banking business, whereas MIDF has investment banking and asset management businesses — which MBSB does not — and lends mainly to small and medium enterprises (SMEs).

With an asset size of RM54.95 billion, MBSB is the second largest standalone Islamic bank after Bank Islam Malaysia Bhd (RM89.85 billion). In comparison, MIDF had assets of RM7.96 billion.

MBSB made a net profit of RM460.19 million in the year ended Dec 31, 2022 (FY2022), up 4.9% from RM438.71 million in the year earlier, on the back of lower modification loss following the end of the moratorium under a repayment assistance programme. Revenue improved by a marginal 0.7% to RM2.64 billion. MBSB’s financing grew by 6.6% to RM38.56 billion.

“The group is pursuing a four-pronged strategy to grow its financing by 7%-8% by the end of the year. The strategy includes plans to increase market share in corporate and property financing, expand its footing in SME financing, particularly among businesses involving agriculture and food manufacturing as well as prioritise its CASA-i [Islamic current accounts and savings accounts] to fund the financing growth,” its CEO Datuk Nor Azam M Taib said in a Feb 23 statement. Nor Azam took the helm in July last year after Ahmad Zaini’s unexpected demise in August 2021 from Covid-19 complications.

As for MIDF, it reported a 14.1% rise in net profit to RM44.39 million for the first nine months of FY2022, as operating revenue improved by 13.9% to RM310.2 million. It saw a slightly higher expected credit loss (ECL) allowance for loans of RM5.56 billion compared with RM5.18 billion a year earlier, but the impact on earnings was mitigated by a higher writeback of RM3.09 million on ECL allowance for financial investments compared with just RM269,000 before.

MBSB’s share price has gained 4.3% over the last 12 months to close at 60.5 sen on March 1, which gives the company a market capitalisation of RM4.34 billion. At 60.5 sen, the EPF’s stake in MBSB is valued at RM2.86 billion. Bloomberg data shows that AmInvestment Research has a “buy” call on MBSB with a target price (TP) of 73 sen, while Kenanga Research has it on “underperform” with a TP of 51 sen.