Ratings on Monday warned that a proposed merger between CIMB Group, RHB Capital and non-bank lender Malaysia Building Society (MBSB) posed challenges and risks for the new group amid a complex integration process.
On Thursday, the three listed entities issued a media statement saying that they had received approval from the central bank to commence discussions with the aim of merging the businesses of RHB and CIMB, as well as creating an enlarged Islamic banking franchise with MBSB.
To this end, the three had entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure and other terms and conditions for the proposed merger.
If it pans out, the merger would create the largest bank in Malaysia and the fourth-largest lender in South-east Asia, with total assets of US$194 billion (S$241 billion) and a 23 per cent share of domestic loans, compared to Maybank's 18 per cent.
The resulting scale could also present synergies at a time when growth prospects in the Malaysian financial system are under pressure owing to high leverage.
It could also set off a second wave of mergers and acquisitions in the Malaysian banking system, a point not lost on investors.
The shares of smaller banks such as Hong Leong Bank, Affin and Alliance Bank all rose on Monday.
The merger would also be in keeping with the central bank's wishes. Its 2011-2020 Financial Sector blueprint calls for further consolidation.
The idea isn't new. CIMB and RHB have had a go before, but the deal fell through over pricing. But the inclusion of MBSB is new and could have been suggested by the central bank, which is uneasy about the activities of non-bank lenders.
Fitch found the inclusion of MBSB puzzling.
"The inclusion of the smaller building society is surprising, as it has a significantly different business mix, with over 70 per cent of gross loans in higher-risk personal unsecured lending - a segment where there are concerns about over-indebtedness," the agency noted.
The merger would also be complicated by duplication. "There would be significant network overlap at the combined entity, with close to 550 branches in Malaysia, compared with 399 at Maybank - currently the largest bank," Fitch said.
"There may therefore be substantial opportunities for cost improvements in the merged entity", but over the longer term.
Fitch wondered if rationalising branches and staff was politically acceptable.
However, that has never been a problem in Malaysia where bank consolidation has been taking place since 1999. From 58 financial institutions then, there now remain only eight.
But Fitch raised a point regarding capital, pointing out that RHB and MBSB lagged the larger Malaysian banks in current and savings account (Casa) deposits. That could hurt the merged entity's funding ability, relative to CIMB on its own.
"Fitch estimates 22 per cent of deposits at the merged entity would be Casa on a pro forma basis, much lower than CIMB's current 38 per cent," the agency said.
"As CIMB may have to pay a premium for RHB/MBSB, the merger could result in weaker capitalisation at the new entity, relative to CIMB's current position, unless pricing discipline is exercised and sufficient high-quality capital is raised," the agency concluded.
This article by The Business Times was published in MyPaper, a free, bilingual newspaper published by Singapore Press Holdings.