THE aborted merger of CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) has left many wondering  — what’s next for them? One of the topics that have emerged from the collapsed talks is the possibility of another suitor for RHB (fundamental: 1.5; valuation: 2.1).

It is no secret that the largest bank in the country, Malayan Banking Bhd (Maybank),  also had its eye on RHB last year but was beaten to the punch by CIMB (fundamental: 1.35; valuation: 2.1). Back in 2011, both Maybank and CIMB had simultaneously pursued RHB. But they walked away after RHB’s Middle Eastern shareholder — Abu Dhabi Commercial Bank (ADCB) — sold its stake to a sister company at a hefty price, setting the valuation bar too high for a merger deal to happen.

With negotiations for the tripartite merger called off now, speculation is rife that Maybank may seize the opportunity to make a move on RHB.

A senior Maybanker acknowledges that in the bank’s “scenario planning” of potential acquisitions of local lenders, RHB has emerged as the top choice. However, he and other bankers point out that Maybank is not likely to make a move immediately.

“When we looked at the scenarios … RHB was the preferred choice. But you have to take into account why the mega merger with CIMB was called off. The reasons for it being called off (see accompanying story) are valid concerns and the same concerns would be applicable to us, so we have to think hard about this,” says the senior banker.

Another senior Maybanker points out that the bank and RHB have too many overlapping businesses and functions. “In a merger, there would have to be staff redundancies, things like VSS (voluntary separation schemes), which employees are unlikely to want to take up in the current economic climate. So, it really makes more sense for Maybank to seek opportunities to fill business gaps instead. If there was a good Thai bank or Indonesian insurance company, those would make more sense for Maybank to acquire.”

Industry observers also note that any acquirer of RHB would likely have to include MBSB (fundamental: 1.2; valuation: 2.4) in the mix. This is because the Employees Provident Fund (EPF), the major shareholder of both RHB (41.5%) and MBSB (64.6%), is likely to want a “bundled” deal akin to the one that had been threshed out with CIMB.

Still, it is no surprise that RHB has caught the interest of potential suitors. It has been one of the best performing local banks in terms of earnings recently.

Despite the tougher operating environment, RHB saw its net profit rise 16.5% to RM1.55 billion on the back of slightly higher revenue of RM7.58 billion in the nine months ended Sept 30, 2014. Annualised return on equity (ROE) stood at 11.8%.  

In contrast, CIMB’s nine-month net profit fell 17% to RM2.91 billion on the back of slightly lower revenue of RM10.47 billion, mainly because of its exposure to asset quality and profitability pressures in Indonesia through Bank CIMB Niaga. The Indonesian operation used to account for about a third of CIMB’s profits. CIMB’s annualised net ROE was 11.6%.

Meanwhile, there is speculation that Japan’s Sumitomo Mitsui Banking Corp may also be keen on RHB. Sumitomo ceased to be a substantial shareholder in RHB in March 2002 when it disposed of a 3.84% stake.

In 2007, there was talk that the Japanese lender had applied to Bank Negara Malaysia for approval to start talks with the EPF for a stake of up to 15% in RHB. But the acquisition never happened. Instead, RHB saw the entry of ADCB as its foreign shareholder.

Sumitomo, however, continues to have a good working relationship with RHB. It still maintains a “Japan desk” in RHB, although it obtained its own banking licence in Malaysia in 2011.

“There is market talk that the Japanese bank could be keen to upgrade that working relationship to a shareholding partnership,” says an industry observer.

However, when asked about the possible emergence of a new suitor, a source close to the major shareholders of RHB says there is no conversation right now on any takeover. “With the merger talks off, the group can get back to focusing on its business. Merger talks can be distracting to all parties involved,” he says.

RHB group managing director Kellee Kam, in an internal memo to staff last week, said the group would now refocus its energy on accelerating its three-year transformation plan.

The plan, known as IGNITE 2017, includes targets to boost revenue from overseas and accelerate Islamic banking growth.

Is CIMB’s heyday over?

Industry observers say CIMB must go back to the drawing board and come up with a concrete solution to improve its dismal earnings and cut costs. The country’s second largest banking group has seen year-on-year earnings drop for the last six quarters since the quarter ended June 30, 2013.

Costs went up substantially after it bought most of the Royal Bank of Scotland’s (RBS) investment banking businesses in Asia-Pacific in 2012, in a move to become a larger regional player, analysts say.

“Perhaps the failed merger talks are a blessing in disguise. CIMB still has to digest its RBS acquisition and its Indonesian business is not doing well … and given the current environment, it could be a bad idea for them to be undertaking an acquisition of that size,” says a banking analyst.

CIMB acting group CEO Tengku Datuk Zafrul Aziz, in an internal memo to staff last week, said while the group was “disappointed” that the merger would not be realised, it would move on with its own plans as it had not pinned all its hopes on the merger.

“In fact, we have been working very hard behind the scenes on our new mid-term strategy and road map to 2018 since we announced the strategic review last year. Now that the merger is no longer proceeding, we are ready to start implementing our strategic plans,” he said, adding that the strategy would involve key focus areas such as culture, productivity, transaction banking, Islamic banking and small and medium enterprises.

Zafrul took over the hot seat from Datuk Seri Nazir Razak last September. Nazir moved on to become group chairman.

MBSB works to become a bank

Non-bank lender MBSB is understood to be working on a five-year business plan. “The tougher economic situation doesn’t allow the group to explore mergers and acquisitions right now … but perhaps in the next one or two years, or when things improve, it might look for another suitor,” a source tells The Edge.

For now, it is continuing with its efforts to become a full-fledged bank. “Once it has moved more towards a banking platform, its options are better for getting a banking licence and doing M&A. It’s almost there on most counts when it comes to closing the gap to becoming a full-fledged Islamic financial institution,” the source adds.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines whether a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard)

This article first appeared in The Edge Malaysia Weekly, on January 19 - 25 , 2015.

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