Aborted mega bank merger in Malaysia signals tougher environment

Decision to back out reflects CIMB prudence.

The cancellation of a proposed merger of CIMB Group, RHB Capital and Malaysia Building Society (MBSB) to form a mega bank underscores the inherent risks related to such a tie-up amid a weakening operating and economic environment resulting in slower growth and banking sector asset quality pressures.

According to a release from Fitch Ratings, as such, the decision to not proceed reflects prudence on the part of CIMB, which has a track record of expanding through acquisitions.

The immediate triggers to the breakdown were the greater than 20% depreciation in the value of CIMB shares since the merger terms were announced in October, and Malaysia's increasingly uncertain economic outlook.

The original plan to create one of south-east Asia's largest banks was ambitious, and would have involved a complex integration process with few opportunities to extract cost savings through synergies in the short term.

Fitch maintains that the merger process would have been lengthy, and the inclusion of MBSB would have made the integration even more challenging owing to the building society's significantly different business mix compared with banks CIMB and RHB.

Here's more from Fitch Ratings:

This is especially the case given the high levels of household debt in Malaysia, and an increasingly challenging operating environment - including slower credit growth and potentially deteriorating asset quality - for the banking sector as a whole.

Meanwhile, the macroeconomic outlook for Malaysia has grown less certain amid the recent sharp falls in the price of crude oil as the country is a net oil exporter.

MBSB's focus on higher-risk personal unsecured lending - one of the areas most sensitive to a weaker environment - would have raised the risk profile of the new entity had the merger gone through, even though Fitch believes the Malaysian banks are well placed to meet the challenges with strong loss absorption buffers.

In light of these risks, CIMB's decision to back away from the deal indicates a level of caution on the part of management.

A successful merger would have helped Bank Negara Malaysia enhance its oversight of the non-bank financial institution (NBFI) sector, which includes credit providers such as MBSB.

Non-bank credit providers account for around 20% of banking sector assets and 19% of total household loans and 60% of total personal financing - the part of the financial system where underwriting has been weakest.

Bank Negara was given a bigger mandate to oversee NBFIs in 2013, and bringing the NBFI segment into the banking system through mergers is one way to improve oversight and transparency. However, it remains to be seen whether such mergers can occur without burdening banks with the higher risk assets that have been built up in some NBFIs after several years of double-digit lending growth.