Declining market conditions have cast doubts over the synergies that can be derived from the three-way bank merger, which, in turn, have led to a relook at the exercise.
Sources say the next two weeks will be crucial, as the parties deliberate if the projections and benefits from the merger can be achieved, given that the market has taken a turn for the worse in the last few months.
The merger in question involves CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB).
Sources say that the merger between CIMB and RHB Cap is less of an issue, considering that is it being structured as a share-swap exercise, valuing both banks at reasonable price-to-book ratios.
"But the issue is MBSB and whether it should be part of the deal or be left out," says a source.
Under the proposed merger, shareholders of MBSB would be offered cash of RM2.82 per share.
"Waning market conditions typically spell lower loan growth, which, in turn, raises the question if MBSB is being included in the deal at too high a valuation," says an industry source.
"A lot of the revenue synergies were based on different assumptions when the market was better. It would now be harder to achieve cost synergies in terms of branch closures and redundancies," the industry player adds.
The impact of a slower economy is already showing. CIMB's third-quarter profit fell 16 per cent to RM890 million (S$333.92 million), hurt by higher loan impairments in Indonesia, while RHB Cap's net profit for the period was down 2.5 per cent to RM545 million.
"Going forward, things are going to be more difficult. If MBSB is part of the deal, then there would be fewer redundancies. Without MBSB, the redundancies would be more than 5,000. Can this be achieved if economic conditions are bad? This does not include other cost-cutting arising from the merger," says a source.
In a report last month, Affin Hwang Capital Research said it had cut its earnings estimates for the banking industry by 2 per cent, 8 per cent and 7.8 per cent for 2014, 2015 and 2016, respectively.
Recall that the proposed merger entails two parts.
The first is CIMB, which is the second-largest banking group in Malaysia, disposing all its assets and liabilities to RHB Cap via a share swap at an exchange ratio of one RHB Cap share for 1.38 CIMB shares.
This was based on a benchmark price of RM7.27 per CIMB share and RM10.03 per RHB Cap share, translating into a price-to-book value (P/BV) ratio of 1.7 times and 1.44 times for CIMB and RHB Cap, respectively.
This valuation was based on CIMB and RHB Cap's book values of RM4.28 and RM6.97 as at June 30.
The second part of the deal involves the proposed merger of CIMB Islamic, RHB Islamic and MBSB to create a mega-Islamic bank. This entity is to remain as a subsidiary of the merged CIMB-RHB Cap.
Under this deal, CIMB Islamic will acquire all the assets and liabilities of MBSB at RM7.8bil, or RM2.82 per share. MBSB shareholders will have a choice either to accept cash or new shares in the unlisted CIMB Islamic group.
At RM2.82, this works out to a P/BV of 1.91 times for MBSB shares, which is higher than the valuation attached to both CIMB and RHB Cap.
Against a weaker outlook, sources say CIMB may not be too keen to pay so much for MBSB.
But the question is: Will the minorities accept a lower offer? Also, would the Employees Provident Fund (EPF) be compelled to accept a lower offer because it has the interest of its subscribers to think of?
The EPF is the main stakeholder in the deal, as it owns 64.6 per cent of MBSB, 41.5 per cent of RHB Cap and 14.6 per cent of CIMB.
"If the synergies are not derived, then the EPF would be the biggest loser. This is something that the pension fund would be wary about," says a source.
One of the outcomes of the proposed merger would be the EPF reducing the percentage of its shareholding in RHB Cap and MBSB, something that the pension fund has sought to do for a long time now.
The EPF ended up with large stakes in RHB Cap and MBSB due to legacy issues from the 1998 financial crisis. Chief executive Datuk Shahril Ridza Ridzuan has made it his top priority to reduce the EPF's interest in listed companies to ensure it remains as an investor and not the driver of the entities.
However, it is in no hurry to do so, especially for its interest in RHB Cap and MBSB. Industry observers point out that with over RM600bil under its management, the fund is under no financial pressure to make any exit of its holdings. It can hold on for the next suitor.
MBSB is an integral part of the creation of the mega-Islamic bank. But being a non-conventional lender, it comes under a more relaxed set of provisioning rules, which is why such institutions do not command the valuations that commercial banks do.
MBSB has different provisioning standards, as being a non-bank financial institution, it didn't come under the purview of the central bank until the wide-reaching Financial Services Act 2013 came into force.
UOB KayHian in a report said, "Concerns over MBSB could be related to the discrepancy in the provision methodology of the institution, which would likely result in the reduction in the offer price for MBSB if it were to align its provisioning policies closer to that of CIMB's and RHB's which are on MFRS139."
But a source close to the deal says that the issues with regards to MBSB's provisioning had already been taken into account before the merger details were announced.
"That difference in provisioning policy has already been accounted for when the proposed merger details were announced. It is not an issue. The problem now is how the adverse market conditions will affect the synergies of the deal and whether CIMB needs MBSB," says the source.
UOB KayHian says that if the offer price for MBSB was adjusted down severely, it may not go down well.
"As the offer price for MBSB involves a cash option, a severe reduction in the offer price may not go down well with the shareholders of MBSB," the research firm says.
It says that the formation of the Islamic bank would allow the merged entity to run a dual leverage banking platform model and this will enable it to "shift some of the duplicative cost within CIMB-RHB Cap (post-merger) to the mega-Islamic bank".
And a compelling offer is required to entice MBSB minorities, given that its largest shareholder, the EPF, would not be able to vote on any final deal after its appeal to do so was dismissed by Bursa Malaysia on Dec 10.
CIMB shares have come down by a quarter, while RHB Cap by some 16 per cent since details of the deal were announced in October. Industry observers note that CIMB shares could be sold down more because it is the one that would be paying for MBSB.
The banks are expected to complete a due diligence on the deal by the end of January, people familiar with the situation say, adding that there is a possibility of the RM45bil deal to create Malaysia's largest bank and an ASEAN powerhouse being called off.
"It all depends on whether both sides are willing to give up a little," says a source.