Post-integration, the group would become Malaysia’s largest bank by assets and the fourth-largest in the region. At first blush, the biggest loser is Maybank, Malaysia’s largest bank by assets and market-cap, and CIMB’s arch-rival. Maybank boasts a diversified mix of earnings from retail, SMEs to investment banking, while CIMB’s corporate DNA is in wholesale finance.
Maybank, which walked away from talks to acquire RHB in May 2011 over pricing concerns, faces the prospect of margin-pressure across the industry, as the new group overturns the prevailing banking order.
However, Maybank CEO Abdul Farid Alias remains unbowed, arguing greater cross-selling, the growth of investment banking, insurance products and Islamic finance, combined with regional expansion, will buttress the franchise. “We know the challenges the deal will bring to the market. It will be good for the country and the competition triggered will force us to adopt a greater sense of urgency in our plans,” he tells Euromoney. Size isn’t everything, he adds. “From a size perspective, in both retail and corporate banking, we don’t need to scale up for the sake of it. If we increase our size, from our current base, the marginal benefits are not going to be much.”
He has a point. Maybank boasts a market-leading position with M$578 billion ($182 billion) of assets, a 19% loan-market share and a M$90 billion market-cap, as of March, while the new group would represent only a modest increase in scale with M$614 billion of assets, a 24% loan-market share and a M$94 billion capitalization, according to Credit Suisse. The merged entity would have the largest market share of deposits and branch network at 545 compared to Maybank, which currently has the largest at 398.
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Abdul Farid Alias |
Farid, who was appointed CEO in August last year, concedes the 12%-14% return-on-equity offered by the domestic market is unsustainable in the medium-term, given the prospect of rising competition, emboldening the push to broaden its regional footprint. Four years ago, Maybank set an end-2015 target for international revenues to represent 40% of the group’s total compared with 30.5% currently. Farid says the CIMB-RHB-MBSB merger makes a domestic acquisition unlikely and, instead, Maybank, which has been on the prowl for targets for the past four years, is looking to grow its business in south-east Asian markets, principally, Indonesia, Thailand and Philippines, however, valuations for target financial firms remain stretched. While Maybank’s total capital ratio is a healthy 16%, Farid says shareholders would be likely to support capital raising in the event of an inorganic play. The Maybank CEO says the lender could consider expanding its fledging private-banking operation in Singapore through inorganic means, and is mulling a retail operation in Saudi Arabia, though the latter plan is in its infancy.
But financial protectionism could also derail the cross-border push, especially in Asia. For example, Indonesian regulators have introduced a 40% cap on stakes held in the country’s lenders by a single owner, calling into question Maybank’s 80% stake in Bank Internasional Indonesia. This regulation – in a Basel III world that makes minority stakes capital-intensive – ultimately scuppered Singaporean state-backed lender DBS’s proposed $7 billion investment in Indonesia’s Bank Danamon last year, in a deal that would have made it the fifth-largest lender in southeast Asia’s largest market.
Farid says regulators have yet to clarify how the regulation would affect Maybank’s Indonesian operations but he hopes that the new, incoming administration will roll back on this protectionist lurch. “We think common sense will ultimately prevail with a recognition that such regulation does not help to attract FDI inflows. In the worst case scenario, this business represents only 7%-8% of our group’s revenues,” Farid says, adding “local institutions don’t have the capacity to buy stakes”.
Malaysia’s decade-long bank-consolidation drive contrasts with Indonesia, where the top 10 control some 80% of total assets and foreign lenders struggle to gain organic market share. Farid, clearly frustrated about the hurdles of tapping into Indonesia’s vast market, says: “The top four banks are state-dominated so should the regulators be concerned about foreign influence in the banking sector? I don’t think so.”
Asked whether the CIMB-RHB-MBSB merger would promote a wave of competitive consolidation across the region, as lenders scale up to defend market shares, Farid says: “I hope bank consolidation will continue but it will take a while. Indonesian banks, for example, don’t yet have a significant presence in Singapore. If you are an Indonesian lender there is a strong ROE offered domestically, so lenders from North Asia are more likely to expand. More generally, in my engagement with regulators, they would like to see banks like ourselves and our competitors to grow across the region to bring in flows and aid the Asean [integration] push.”
Farid adds domestic supervisors should have flexibility to elevate Asean sovereign bonds to risk-free status in Basel III’s capital and liquidity framework, which would help to reduce the costs of cross-border expansion.
His bullish comments contrast with DBS CEO Piyush Gupta, who told Euromoney in June that “political concerns” would inhibit cross-border bank M&A in Asia.