This article first appeared in The Edge Malaysia Weekly on March 22, 2021 - March 28, 2021

AS Datuk Seri Nazir Razak’s appointment as chairman of Bank Pembangunan Malaysia Bhd (BPMB) awaits approval from Bank Negara Malaysia, sources familiar with the matter tell The Edge that he will face an arduous task — merging four development financial institutions (DFIs) under the BPMB banner.

BPMB will be taking the lead in the merger, taking over Danajamin Nasional Bhd, Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank) and Export-Import Bank of Malaysia Bhd (Exim Bank), as stated in Budget 2020.

The four DFIs have been shortlisted for a merger as they are controlled by The Minister of Finance Inc (MoF Inc). While BPMB, Exim Bank and SME Bank are wholly owned by MoF Inc, Credit Guarantee Corp Bhd — a 78.65% unit of Bank Negara — has a 50% stake in Danajamin, while the remaining 50% is held by MoF Inc.

In December 2019, BPMB and Danajamin were given the green light by the central bank to commence merger talks but there has been little news on the matter since.

DFIs are financial institutions that provide capital for economic development projects on a non-commercial basis driven by socioeconomic concerns, as opposed to commercial banks, which are driven by the bottom line.

Sources familiar with the matter say Nazir played a key role in the 1999 merger of Bank Bumiputra Malaysia Bhd and Bank of Commerce Bhd, forming Bumiputra-Commerce Bank under the Commerce Asset Holdings Bhd banner. The Bumiputra-Commerce merger also created a new Islamic bank, Bank Muamalat Bhd, which was hived off to Khazanah Nasional Bhd for RM93 million cash the same year.

In 2006, also under Nazir’s watch, Bumiputra-Commerce Bank acquired Southern Bank Bhd. All are part of CIMB Group Holdings Bhd today.

He has also undertaken many other smaller acquisitions and divestments both locally and regionally.

“He has the requisite know-how. He has done such (corporate) exercises before, but it’s bound to be challenging,” one source says.

The merger with BPMB is expected to address many issues with the DFIs, such as overlapping functions.

For instance, Danajamin was set up in 2009 as a financial guarantor for companies seeking to raise funds via debt papers such as bonds or sukuk. BPMB, which was set up in 1973, also guarantees bonds.

BPMB also has a unit called Pembangunan Leasing Corp Sdn Bhd, which largely handles the small and medium enterprise (SMEs) market, putting it in competition with SME Bank.

SME Bank was created from the merger of Bank Industri & Teknologi Malaysia Bhd and Bank Pembangunan & Infrastruktur Malaysia Bhd in October 2005. In a nutshell, the smaller loans were carved out and placed under SME Bank, while the larger ones were maintained in BPMB.

Exim Bank was incorporated in August 1995 as a government-owned DFI, tasked with delivering effective financing and takaful solutions for cross-border ventures to facilitate the entry of Malaysian companies into new markets, particularly the non-traditional ones.

BPMB’s annual report for FY2019 noted that it chalked up net profits of RM252 million. However, as at end-December 2019, BPMB had a gross impaired financing ratio of 12.18%, up from 10.91% in FY2018.

At least BPMB had retained profits of RM2.58 billion as at end-2019, unlike SME Bank and Exim Bank.

For FY2019, SME Bank chalked up a record net profit of RM206.2 million, recovering from a net loss of RM499.5 million in FY2018. Nevertheless, the DFI had accumulated losses of RM384.69 million as at end-December 2019.

SME Bank’s net impaired loans, advances and financing as a percentage was at 12.6% as at December 2019. This means that for every RM1 loan SME Bank gave out, it got back only 87.4 sen.

Meanwhile, Exim Bank suffered a net loss of RM477.26 million and had accumulated losses of RM1.38 billion for the year ended December 2019. Its net impaired loans as at end-2019 was at 9.63%, down from 10.34% in FY2018.

In contrast, reports have it that Malaysian commercial banks’ non-performing loans (NPLs) are at 1.6% on average.

Danajamin is not a lender and as such is not plagued with NPL issues.

For its financial year ended December 2019, Danajamin’s after-tax profit was RM3.2 million, compared with RM119.2 million in FY2018. FY2019 profits were weighed down by an RM80.4 million provision of claim allowance as a result of a technical default of RM100.7 million by one of its clients.

In short, both SME Bank and Exim Bank are likely to require capital injections from its shareholder, MOF Inc, or the government. A merger between the four DFIs could ease the government’s burden as BPMB is highly capitalised.

As at end-December 2019, BPMB had a risk-weighted capital ratio of 38.83%. In contrast, most commercial banks in Malaysia have a capitalisation of below 16%, according to a report by Moody’s released earlier this month.

The merger is also likely to address some of the other issues, such as Bank Negara’s interest in Danajamin.

“What is a regulatory body doing as a shareholder in Danajamin?” the source asks. “So, all this will be cleaned up.”

He cautions, however, that “Merging three or four badly run DFIs into one could create a huge, badly run DFI.”

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