Sovereign wealth fund trips up Malaysian merger again

This is becoming a habit. For the second time in three years and the third time in six, a merger involving Malaysia’s RHB Bank has collapsed. Sooner or later the spurned partner in a string of failed relationships must start to think: maybe it’s about me. Or, in this case: is it my shareholder? 

When RHB’s three-way merger with CIMB Group and Malaysia Building Society collapsed in 2015, it was blamed in part on RHB’s second-largest shareholder, Aabar Investments, demanding a higher valuation (although CIMB chairman Nazir Razak suggested to Euromoney that CIMB itself pulled the plug). 

Aabar’s appearance on the register of RHB in 2011 had already torpedoed earlier merger talks between RHB, CIMB and Maybank. Now, rumours are that Aabar’s expectations have also derailed the planned merger with AMMB Holdings, known locally as AmBank. Aabar is part of the Abu Dhabi sovereign wealth fund Mubadala; its mandate is pretty clear: make money for the long-term prosperity of its state and its people. Consequently, it is tough in negotiations and, with a multi-generational time horizon, not in any rush. 

Also, it paid a lot of money for its stake in RHB in 2011, buying at a valuation of 2.25 times book from its sister company, Abu Dhabi Commercial Bank. Right now, RHB is not even trading at book value. That must weigh on the shareholder’s calculations.

CIMB chairman Nazir Razak

In the earlier CIMB/RHB deal, the question was how RHB was valued within that merged entity; here, the question was instead how much RHB should pay for AmBank. AmBank has a ton of trouble to deal with because of its associations with 1MDB and is, in any event, too small to thrive in Malaysia’s crowded market. So Aabar will have sought to buy it at as low a price as possible. 

But AmBank’s own biggest shareholder is ANZ (24%), which, while it categorically wants out of investments like AmBank and would have had a better shot at exiting with the merger going through, is not going to be pushed around on price while it is answerable to some of the world’s most belligerent shareholders in Australia.

Complicating things further, the biggest investor in RHB (41%) and one of the biggest in AmBank (10%) is exactly the same institution, the Employees Provident Fund, which therefore cannot get involved. 

It is possible that RHB did not like what it found in due diligence about AmBank’s contingent liabilities. Another theory is that bad press about potential lay-offs through the merger’s cost savings looked bad ahead of national elections, souring the previously positive public institutional support for the deal.

Whatever the reason, the outcome is clear: it’s dead, again.

So, what now? Malaysia’s banking sector remains bloated, with six big banks where four would be ideal. And with every failed integration, the appeal of bidding for or teaming up with RHB must surely be declining. 

UBS analyst Jason Bedford’s August 23 report on shadow loan books at Chinese banks is a fine piece of work, reviewing the financials of 237 banks across China to understand shadow lending and the threats it represents. 

But the single most eye-watering piece of information comes 13 pages in, where Bedford looks at an Inner Mongolian (that is, still mainland Chinese) lender called Baoshang Bank. “The largest borrower in the bank’s shadow loan book had borrowings equivalent to 126% of Baoshang Bank’s net assets at Q1 17,” he writes.

Just to spell that out, that means the bank effectively lent one and a quarter times its own entire net assets to one borrower. The China Banking Regulatory Commission has a clearly stated limit of 15%.

Troubling though that is, Bedford does not yet see a systemic crisis coming, despite the fact that system-wide shadow loans – more specifically, trust beneficiary rights products and directional asset management plans – were worth Rmb14.1 trillion ($2.14 billion) at the end of 2016, equivalent to 18.9% of China’s GDP. 

Previous estimates taking a broader definition of shadow financing have been much higher: CLSA’s Francis Cheung said Rmb54 trillion last year, or 79% of GDP. With many banks using these products to originate loans that are on-sold to other banks, there is a real risk of contagion between institutions. Banks have already begun lodging law suits against each other in defaults. Unwinding at least some of these exposures is vital.