This article first appeared in The Edge Malaysia Weekly on May 20, 2024 - May 26, 2024

WORK on Phase 2 of the merger of Malaysia’s development financial institutions (DFIs), involving Bank Pembangunan Malaysia Bhd (BPMB), Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank) and Export-Import Bank of Malaysia Bhd (Exim Bank), has begun and could be wrapped up by year end if things go as planned, industry sources say.

“By the third quarter, at the latest, there should be some announcement about the planned merger of the banks,” a source tells The Edge.

It is understood that the merger, in which BPMB is expected to take the lead, is to be effected by a share swap. 

“Things are moving,” another source says.

BPMB says  it is “not able to comment at this point in time”, in response to emailed questions from The Edge.

Back in 2019, the government had mooted that BPMB, Danajamin Nasional Bhd, Exim Bank and SME Bank be restructured and merged under one entity through a two-phase approach, in a bid to improve the DFI ecosystem.

Phase 1 of the merger, that of BPMB and Danajamin, a financial guarantee insurer, was formally concluded in March last year, following the transfer of the latter’s business and undertakings to BPMB, after the acquisition was completed in November 2021.

Since then, things have gone quiet on the merger front despite all eyes watching out for Phase 2 — the union of the now-enlarged BPMB with SME Bank and Exim Bank — to take off. During his Budget 2024 speech last October, Prime Minister Datuk Seri Anwar Ibrahim urged for the restructuring of DFIs through the merger of these three entities.

Sources say it had been challenging to get Phase 2 off the ground because the DFIs, each of which is regulated by Bank Negara Malaysia, come under the purview of different ministries. “There’s the politics to manage,” one says.

On March 20 this year, Datuk Sulaiman Mohd Tahir, the former CEO of banking group AMMB Holdings Bhd, became chairman of BPMB. It is understood that he was appointed to oversee Phase 2 of the merger. 

BPMB’s former chairman Tan Sri Nazir Razak had, in a business forum last November, urged the government to get the merger done as soon as possible. Nazir, who was with BPMB for two years until April 22, 2023, helping it move on from its chequered past of weak governance that had led to heavy losses, had joined the group with a view to steering the planned consolidation of the DFIs.

“I implore the government — get this merger executed as soon as possible,” he had said, adding that BPMB was still too small to compete effectively following the Phase 1 merger. “It needs economies of scale.”

Based on the latest available data from their websites, BPMB had an asset size of RM27.02 billion as at end-2022, compared with Exim Bank’s RM6.66 billion. SME Bank had total assets of RM12.38 billion as at end-September 2023.

BPMB’s gross loans stood at RM18.48 billion at the end of 2022 compared with Exim Bank’s RM4.76 billion, while SME Bank’s (as at Sept 30, 2023) stood at RM9.06 billion.

Analysts and industry sources say a key reason to get the DFIs merged under one entity is so that they can scale up and compete better in a highly competitive industry. DFIs have a strategic role in the country’s development agenda.

“The consolidation exercise will see an enlarged DFI (BPMB) with larger economies of scale and better realignment of strategic mandates. If well implemented, this will allow more efficient allocation of capital and resources to finance priority segments and support the national development agenda,” an analyst tells The Edge.

There are currently six DFIs in the country that are regulated by Bank Negara under the Development Financial Institution Act 2002, according to the central bank’s website.

Apart from the three to be merged, the rest are Bank Kerjasama Rakyat Malaysia Bhd (Bank Rakyat), Bank Simpanan Nasional and Bank Pertanian Malaysia Bhd (Agrobank).

“Like other DFIs, BPMB may take on higher-risk credits in extending financing to strategic priority sectors, in view of its developmental mandate. As at end-March 2023, its gross impaired financing ratio inched up to 11.3%, largely due to a smaller financing base (end-December 2021: 10.7%). The sizeable share of lending to large-scale and long-term development projects in the group’s financing book exposes it to a high degree of customer concentration risk,” RAM Ratings said in a report on BPMB on Dec 8 last year.

BPMB reported a higher net profit of RM211.71 million for the year ended Dec 31, 2022 (FY2022) compared with RM176.44 million a year earlier.

According to RAM Ratings, BPMB’s 49% year-on-year (y-o-y) increase in pre-tax profit to RM379.3 million that year was primarily driven by a broader net financing margin and a jump in net earned premiums, following the merger with Danajamin.

“BPMB’s profit performance nonetheless remains sensitive to big-ticket impairment expenses in view of its financing profile. On balance, the group’s loss absorption buffers stayed robust, with its adjusted gross impaired financing coverage ratio (including infrastructure support fund) and bank-level Tier-1 capital ratio at a respective 190% and 35% as at end-March 2023,” the ratings firm said.

SME Bank’s net profit for the first nine months of FY2023 grew 30% y-o-y to RM34.09 million. Exim Bank, meanwhile, reported a net loss of RM66.48 million for FY2022, compared with a net profit of RM51.11 million the year before.

All three entities are owned by Minister of Finance (Incorporated). SME Bank is supervised by the Ministry of Entrepreneur and Cooperatives Development, while Exim Bank comes under the purview of the Ministry of Investment, Trade and Industry.

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