This article first appeared in The Edge Malaysia Weekly on May 29, 2017 - June 4, 2017

TAIWAN’s largest financial group, Cathay Financial Holding Co, has agreed to acquire Bank of Nova Scotia Bhd for US$255 million (RM1.096 billion), putting it on course to become the first Taiwanese group to own a bank in Malaysia.

A source tells The Edge that the deal values Scotiabank at about 1.1 times its book value.

In a statement last Friday, Cathay Financial said the acquisition will be done via its two subsidiaries, Cathay United Bank and Cathay Life, which are taking a 51% and 49% stake respectively in the Kuala Lumpur-based bank.

It expects to complete the acquisition in the second half of this year. The parties will first need to get approval for the deal from banking regulators in Taiwan and Malaysia.

On March 8, Cathay Financial announced that it had exclusive rights until April 30 to negotiate an acquisition of Scotiabank. The deadline had passed without an update on the talks, until last Friday.

Low-key but profitable, Scotiabank, which has a 44-year history in Malaysia, is wholly-owned by Canada’s third largest lender by assets, Bank of Nova Scotia.

The Edge had reported in June last year that the Canadian group was exploring the sale of its Malaysian subsidiary as part of a wider plan to scale back in Asia, to focus on domestic banking and certain key South American markets.

It valued Scotiabank at C$311 million (US$231 million) in its 2016 annual report.

There is much interest in the industry as to whether this acquisition will be successful, given that it was only last year that another Taiwanese financial group, CTBC Financial Holding Co Ltd, failed in its quest to buy Kuala Lumpur-based The Royal Bank of Scotland Bhd.

Four months after CTBC agreed to buy RBS Malaysia for US$189.7 million, or 0.95 times the latter’s book value, it called off the purchase in August, citing slow progress on the planned acquisition.

A source tells The Edge that the deal, which required the approval of Bank Negara Malaysia and Taiwan’s Financial Supervisory Committee, was scrapped because of regulatory delays in Taiwan after CTBC’s major shareholder, Jeffrey Koo Jr, and other executives got into trouble in Taipei over alleged illegal financial dealings and embezzlement involving the conglomerate. The scandal would not have helped the regulators’ assessment of the group.

“Because the major shareholder got into trouble, CTBC probably thought it would not be able to get the deal through in Taiwan,” the source says.

RBS Malaysia, a profitable entity, then went on to wind down its operations in the country. Its loss-making UK-based parent company RBS Group had been seeking to exit a number of markets globally, including Malaysia, either through outright closures or sales.

A source close to Scotiabank says the bank is unlikely to go down the same route as RBS Malaysia, should Cathay Financial’s planned acquisition not pan out. It will just seek other suitors, including those that had expressed interest in the past.

“A shutdown hasn’t been discussed ... it’s about looking for suitors,” the source tells The Edge.

To Cathay Financial, the real value in buying Scotiabank is the latter’s banking licence. Commercial banking licences are hard to come by in Malaysia — the last time Bank Negara issued such licences was in 2010, to five foreign financial groups.

There are currently 18 licensed foreign commercial banks here — but none so far from Taiwan. Taiwanese banks are increasingly looking abroad to grow income, given intense competition at home, and have been eyeing stakes in Southeast Asian lenders.

Cathay Financial already has a 22.7% stake in the Philippines’ Rizal Commercial Bankingh Corp and 40% in Indonesia’s Bank Mayapada Internasional.

It is too early to say what Cathay Financial plans to in Malaysia, but a source points out that the group focuses on corporate, retail and SME banking in the region.

Scotiabank commenced operations in 1973, and became a locally incorporated entity in 1994. In 2007, it had as many as five branches in Malaysia, when it had a stronger focus on retail banking. These days, it does mainly corporate banking, serving customers from its sole branch in Menara Hang Seng in Kuala Lumpur, corporate sales offices in Johor Baru and Penang and an offshore branch in Labuan.

It reported a net profit of RM20.88 million in the last financial year ended Oct 31 2016, down 56% from RM48.09 million a year before. It said the drop was due to lower interest income from a lower loan base, lower trading income, higher provisions and an increase in operating expenses.

Its total assets stood at RM3.4 billion as at Oct 31, and the size of its gross loan book was RM2.14 billion compared with RM2.9 billion a year earlier.

Scotiabank CEO and country head Sivadas Menon did not respond to requests for comment.

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