Too many M'sian Banks, Consolidation Needed

Tuesday April 12, 2011
Raison D'etre - Risen Jayaseelan



When change is needed and no one is budging, sometimes you need an outsider to stir things up. This seems to be the case for banking consolidation.

Despite the merits of consolidation having been spelt out over the years, little progress has been made. Malaysia has nine domestic banks, which are too many considering that most of them fall within the mid to small size category. Scale will increasingly determine a bank's future.

To be fair, some banks are believed to be exploring consolidation and Hong Leong Bank Bhd is in the midst of acquiring EON Capital Bhd. Still, one wouldn't be far off the mark to describe the state of banking consolidation in Malaysia as slow-going.

But an interesting development took place last week, when Abu Dhabi Commercial Bank Bhd (ADCB) appointed advisors to help it determine what to do with its 25% stake in RHB Bank Bhd.

This move could become a catalyst for banking consolidation, as the advisors seek out a possible deal that is palatable to ADCB and RHB's other big shareholder, the Employees Provident Fund (EPF).

Consider this scenario: What if Goldman Sachs and Bank of America Merrill Lynch (ADCB's advisors) put together a deal in which a larger local bank makes an offer to take over RHB, offering a share swap to the latter's shareholders?

Such a deal would proffer an attractive opportunity to both EPF and ADCB to hold shares in a much larger financial institution that will become the largest in the country with a strong regional presence.

More significantly, such a deal will surely spark off a chain of events, spurring on the other big bank in the country to find itself an acquisition target or targets so that its size remains comparable to the soon-to-be formed giant that RHB will be part of.

This theory, though, may be pooh-poohed by those who reckon that all ADCB is looking for is a quick exit from the Malaysian market and will therefore settle for anyone who is wiling to pay a premium-to-market price for its 25% stake.

But that is not necessarily the case. Firstly, ADCB is not a distressed seller. A quick look at ADCB's financials will tell you that while the bank had been hit by the recent financial crisis, it has since shown significant improvements.

Indeed, it has been so prudent with its provisioning that the company is now likely to receive significant write-backs over the next few years from money it had lent to Dubai World.

ADCB returned to the black in 2010, posting a profit of Emirati dirham (AED) 391mil (US$106mil) for the year after taking significant impairment provisions of AED 3,287mil (US$895mil). It reported a loss of AED 513mil (US$140mil) in 2009 largely due to provisioning.

What is more likely the situation with ADCB is that it is having to allocate a significant amount of capital for its investment in RHB, which is required under strict banking rules.

However being only able to equity account its 25% holding in ADCB may not necessarily be the best use of that capital. Hence this is why it is rare for one bank to directly own minority stakes in other banks.

It makes more sense for banks to own a majority stake in another bank as that would entitle the former to consolidate the earnings of the subsidiary bank.

For a bank like ADCB, it may make more sense for it to use its capital to grow its business or loans in the UAE, which seems to be picking up after the crisis.

Hence ADCB, if given the chance, may want to make RHB its subsidiary. So too would Australia and New Zealand Banking Group Ltd (ANZ) of its investment in AMMB Holdings Bhd.

This is, however, not likely for now - Bank Negara recently reiterated its policy that the foreign shareholding cap of 30% stays. The central bank did add that any request for an increase in foreign shareholding will be dealt with on a case-by-case basis.

But with little indication that foreign parties will be allowed to increase their shareholding, ADCB's best bet may be to sell its stake and that move is what could prove to be the spark for the next phase of Malaysia's banking consolidation.


Business news editor Risen Jayaseelan is cognizant of this statement by one of the country's top bankers in a recent interview with a business weekly: “I do get irritated with deal peddlers' who just want fees and are completely unrealistic about the real business challenges of mergers and love to fuel rumours”.

http://biz.thestar.com.my/news/story.asp?file=/2011/4/12/business/8463103&sec=business