This article first appeared in The Edge Malaysia Weekly on September 11, 2023 - September 17, 2023

THE ongoing merger between Malaysia Building Society Bhd (MBSB) and Malaysian Industrial Development Finance Bhd (MIDF) has seen a lukewarm response from investors. However, analysts are optimistic about the long-term prospects for the merged entity, which will see the two financial institutions operating as a single entity from early October.

Last Friday, MBSB’s share price closed at 71 sen, or 36% lower than the 96.52 sen MIDF accepted for the merger deal. At the closing price, MBSB was trading at a price-to-book value of 0.57 times.

Market observers say a reason for the lacklustre response could be the merged entity’s lower book value post-merger. It is worth noting that the merged entity is estimated to have a lower net asset value per share of RM1.16 compared with RM1.25 as at June 30 due to MBSB’s dividend payout and new shares issuance as part of the merger.

“MBSB’s share price has been corrected after a dividend payout of 8.5 sen. If included in the dividend, the share price of MBSB is close to 80 sen, which is a 20.6% discount to the price of the merger deal,” a market observer says.

In April, MBSB paid 8.5 sen per share to its shareholders, the highest dividend it has ever paid out.

A banking executive points out that the merger between MBSB and MIDF will be something to watch out for, especially with the merged entity putting in a new management to work on the banks’ synergy and growth.

“Only after the merger is done will both financial institutions’ books be consolidated. The commercial synergy between the two entities is expected to be powerful considering that, in the past, MIDF’s product offering was limited to investment banks.

“Once the merger is completed, the management is expected to communicate their going-forward strategy, seizing the low-hanging fruit, that was limited for both financial institutions to pursue in the past,” the market observer says.

In April, MBSB received regulatory and shareholders’ approval to buy MIDF from Permodalan Nasional Bhd (PNB) for RM1.01 billion which is to be satisfied via the issuance of 1.05 billion MBSB shares at 96.52 sen per share. According to its circular, the offer price was at a 53% premium to MBSB’s historical trading price of 64.5 sen per share.

It is worth noting that the valuation is based on the book value of both financial institutions.

Only a small number of banks in the country are trading above their book value, namely, Malayan Banking Bhd, Public Bank Bhd and Hong Leong Bank Bhd. On the other hand, the banks that are trading below their book value include Affin Bank Bhd, which is trading at 0.43 times its book value, Bank Islam Malaysia Bhd (0.66 times) and Alliance Bank Malaysia Bhd (0.77 times).

Despite the not-so-exciting share price movement of MBSB, analysts remain bullish on its prospects. On a year-to-date basis, its share price has risen close to 15% to 71 sen, giving it a market capitalisation of RM5.09 billion.

Rakuten Trade head of equity sales Vincent Lau says he is optimistic about the merger between MBSB and MIDF, as it allows MBSB to tap MIDF’s strengths in investment banking. At the same time, MIDF will finally graduate to become a full-fledged bank.

MIDF is currently mainly involved in investment banking, asset management and development finance.

“Investors are probably taking a wait-and-see approach to this merger. In my opinion, this merger is a good fit as there is no overlap in their roles. MBSB is in the consumer banking space and this would give MIDF the ability to strengthen its balance sheet and broaden its offerings, especially to its existing customer base of SMEs (small and medium enterprises) which grow in size and need more financial services,” he tells The Edge.

Meanwhile, MBSB used to be a non-bank lender. It transformed into a banking entity in 2018 following a merger with Asian Finance Bank Bhd (AFB). MBSB acquired AFB in a RM644.95 million deal that was settled via cash and the issuance of new shares.

Following the merger, AFB undertook a rebranding exercise and on April 2, 2018, it changed its name to MBSB Bank Bhd.

According to a source, the share swap between MBSB and MIDF is currently ongoing and that the merger is expected to be completed in early October.

“It is estimated that the merged entity will start as early as Oct 2, meaning the current MBSB will be a new entity by then,” the source tells The Edge.

The merger will see the Employees Provident Fund’s shareholding in MBSB shrink to 57.45% from 65.87%. PNB will emerge as a substantial shareholder in MBSB with a 12.78% stake.

In a Sept 1 report, Kenanga Research points out that the merged entity is aspiring to lift up its current account savings account (CASA) level in the near term and build its corporate portfolio with a higher mix of retail and SMEs.

“MIDF’s existing propositions appear to have little overlap with MBSB’s suite of products. This could present a more complementary relationship where cross-selling opportunities may arise.

“We think the group may benefit greatly from the introduction of wealth management products to its customers,” it says.

“In the longer term, should a higher CASA mix materialise, the lower translated funding cost could provide greater flexibility to the group to offer more attractive financing rates. This could also be a catalyst to increase long-term financing growth going forward,” Kenanga Research adds. 

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