Indirectly, the seeds of the proposed merger between CIMB Group Holdings, RHB Capital and Malaysia Building Society were sown not in Kuala Lumpur but in the world's financial centre - London.
When CIMB got the mandate to be one of the book runners for the first Islamic finance sukuk raised by a sovereign in the Western world, it was a sure sign that Islamic finance was gaining wider acceptance.
Upon returning to Kuala Lumpur, CIMB’s head honcho Nazir Razak spoke to a group of journalists during Invest Malaysia about how Islamic finance was at the tipping point for growth, considering that the Western world was embracing it.
Malaysia is cutting edge in Islamic finance but there have been no takers for a proposal by Central Bank governor Dr Zeti Akhtar Aziz to establish a mega-Islamic bank with a capitalisation of US$1 billion. It’s easy to fathom why.
No bank would want to fork out $1 billion to establish a mega-Islamic bank as the returns are not there. But the landscape is fast changing and Nazir seized the moment.
On Thursday, he proposed the setting up of a mega-Islamic bank as part of a merger with RHB Capital and Malaysia Building Society (MBSB) that could possibly create the largest bank in the country and one of the largest in the region.
“The merger fulfils the Central Bank’s objective of the creation of a mega-Islamic bank,” an investment banker said.
RHB’s decision last month to call off its proposed buy of Indonesian PT Bank Mestika Dharma, which it had been pursuing since 2009, as well as Nazir’s recent relinquishment of his position as CIMB Group chief executive to take over as chairman effective September 1, were the telling signs of a much bigger plan that was brewing.
Green light from central bank
The three financial institutions announced last week that they had received the green light from the Central Bank to start exclusive talks for the proposed merger, which includes the mega-bank.
In this respect, MBSB, an Islamic financial institution, is slated to fill that role in the merger. The parties have 90 days to decide on the pricing, structure and other relevant terms and conditions. The Central Bank’s approval is valid for six months from Thursday.
Amidst this, questions are being raised as to why there is an exclusivity clause in the 90-day agreement, which essentially means that there will not be any competing bids for RHB during this period, suggesting that shareholders may be missing out on more competitive bids.
“There are two reasons for this. One is that RHB Cap is not being sold – it is a merger candidate. And secondly, it is to minimise disruptions,” said an official close to the Employees Provident Fund.
The fact that the Central Bank gave the three institutions approval in less than 24 hours after they wrote to it is a sure sign that it is not against the merger.
If the mega-bank materialises, it would not be difficult to see why it would easily give the country’s current largest bank – Malayan Banking Bhd (Maybank) – a run for its money.
Based on latest figures, the merged entity’s asset size is expected to be more than 600 billion ringgit ($188.32 billion) with a market value close to 90 billion ringgit ($28.25) and combined profits exceeding 7 billion ringgit ($2.20).
It will surpass Maybank, which had an asset size of 578 billion ringgit ($181.42 billion) as of March 31.
Operationally, RHB and CIMB’s resources combined would give a boost to the merged entity’s regional presence.
For one, RHB, which has a full banking licence in Singapore that enables it to venture into diverse businesses – consumer banking, business banking, corporate banking, treasury and investment banking – intends to grow this aggressively over the next few years. This would complement CIMB’s Singapore operations.
CIMB, meanwhile, has a strong commercial presence in Indonesia – something which RHB is lacking – via its PT Bank CIMB Niaga Tbk, which is a major contributor to the group’s overall earnings.
There is no doubt that the merged entity would be huge.
According to a source, the deal is likely to be done at 1.75 times book value based on CIMB’s current valuation of almost 1.70 times book.
In 2012, RHB paid 1.77 times book value for OSK Investment Bank, lower than the 1.9 times book value Maybank paid for Kim Eng Securities.