Friday, July 18, 2014

Does The CIMB, RHB and MBSB Merger Make Sense?



Last week, the Malaysia Banking world announced a potential game changer for the whole industry. CIMB Group Holdings (CIMB: MK), the country’s 2nd largest bank announced a potential


merger between RHB Capital (RHBC: MK) and Malaysia Building Society Bhd (MSB: MK). If this is successful, it will form the largest bank in Malaysia by asset size (RM614 Billion), surpassing the incumbent, Malayan Banking Berhad (MAY: MK). RHB Capital is actually the fourth largest bank in Malaysia.


However, does the merger actually make sense for shareholders?


Firstly, who are the players? CIMB Group is one of the largest bank in the Southeast Asia region. It currently offers consumer, corporate, investment, Islamic banking services. It is runs an asset management company and provide insurance products and services through banassurance arrangements. The bank is a true regional bank with presence in 8 out of 10 ASEAN countries and even has presence in China, Hong Kong, Bahrain, India, Sri Lanka, Australia, Taiwan, Korea, USA and the UK.


RHB Capital is the holding company of RHB Bank, It is the fourth largest bank by asset size in Malaysia. Although it also has presence in a few countries outside of Malaysia, it still obtain the majority of its assets and earnings from Malaysia.


Malaysia Building Society Bhd is not considered a bank as it operates under an “Exempt Finance Company”. However, it is still able to provide banking services such as loans and deposits. Most importantly, MBSB has a strong Islamic financial presence in Malaysia.


The three parties hoped that the merger will create a mega Islamic bank for Malaysia. This comes as Islamic Banking is gaining momentum around the region as CIMB is working on the first Islamic finance sukuk (Islamic Bond) for a sovereign in the Developed nations.


Value In Action


However, it seems that CIMB is still able to grow its Islamic financing business with or without the merger. So the reasoning that the merger is necessary to grow the Islamic finance services of the group seems weak. One thing for sure, economies of scale is extremely important in the banking sector, and by creating the largest bank in Malaysia, the advantages that the enlarged bank will enjoy is definitely important. Don’t be surprise if Maybank starts some merger talks of its own to fight back.

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