SINGAPORE, Oct. 11 (UPI) -- Last year, the Malaysian central bank had indicated it would leave the consolidation of the banking sector to market forces. Nothing happened. Now, Prime Minister Abdullah Badawi says he wants to "encourage" banks to merge, to prepare for increased competition from overseas rivals and become international predators as well.
This is a clear signal a new round of mergers and acquisitions is finally about to start four years after a first wave of consolidation. Though the government cannot "force" banks to merge, it has stakes in several through its investment arm Khazanah. RHB Bank being an associate company under Khazanah, which also has investments in Commerce Asset-Holding Bhd (CAHB) and Malayan Banking (Maybank).
And as CAHB group chief executive Dr. Rozali Mohamed Ali pointed out Monday in an interview with a local newspaper, if there is a compelling argument why banks owned by the government should be merged, it wouldn't be because "it will be neat and easier in their portfolio," but rather because it can be shown that when banks merge, they can be more efficient, more competitive and provide better value.
The most likely takeover targets are EON Capital, Southern Bank, Hong Leong Bank and Affin Bank, banking analysts said. Shares of Southern Bank and Affin Holdings have already been rising in recent weeks on speculation of a consolidation in the sector.
Yet investors should not get too excited. So far, attempt to consolidate have failed. Pricing and management control have now twice sent AMMB merger talks belly-up, first with EON Capital and then with CAHB.
Given the strong positive economic environment, there is little incentive for potential vendors to lower their asking prices as their operating environment is expected to improve, ensuring higher profitability over the next couple of years, banking analysts said.
Yet, there appeared to be now a new impetus to encourage them to review their strategy. "It is my intention to see that Malaysian banks are strong," Abdullah said last week, following on comments by Azman Mokhtar, the head of Khazanah, who said state-backed lenders Maybank, CAHB and RHB Bank were "national champions" that had "something to offer regionally."
So far, only two local banking groups have expanded regionally, with Maybank taking a stake in the former P&B Republic Bank of the Philippines, which is now known as Maybank Philippines, and CAHB acquiring a 51 percent stake in Indonesia's Bank Niaga.
Maybank and CAHB's separate attempt to buy a 51 percent stake in Bank Permata, Indonesia's seventh-largest lender, failed last week when the stake went to Standard Chartered.
Analysts said that the banking sector has been reluctant to consolidate further, because in most cases banks are still digesting the previous round of mergers. Given that banks were not able to shed excess human resources easily, they have been unable to maximize the full cost synergies of their mergers. Another round would compound the issue further, analysts said.
The previous round of bank consolidation was initiated by the government in 2000. Then, 54 banks merged into 10 core groups, so-called anchor banks.
According to credit rating agencies, most banks have been successful in maintaining prudent, well-capitalized balance sheets while responding to a changing banking landscape. Yet, the search for higher return should prompt a combination of organic and acquisition-based growth strategies ahead of the planned liberalization of the banking sector in 2007, Fitch said earlier this year.
Though the government has not really indicated how many banks ideally should be left standing, some are arguing there is only room for four locally-owned banks.
One possibility would be for smaller lenders to merge together to form a large banking entity. These lenders are finding it increasingly difficult to compete, especially as interest rates have fallen. Even with the current restrictions, foreign banks already account for 26 percent of all bank assets in Malaysia.
Yet, some analysts point that a merger of equals amongst the smaller banks would have little upside for shareholders. Such a merger is unlikely to be satisfactory to any of the smaller bank vendors wanting to exit, as they would still end up with shares of the new merged entity rather than cash, one analyst noted. Besides, any merger of equals is likely to destroy value to the shareholders given that it would be difficult to carve out cost synergies, he added.
Only Hong Leong Bank appears in a strong enough position to offer any of the vendors a combination of cash and shares which is likely to make a deal interesting, analysts said.
