KUCHING: As investors await further details on the merger between CIMB Group Holdings Bhd (CIMB), RHB Capital Bhd (RHB Cap) and Malaysia Building Society Bhd (MBSB), analysts believe Malaysia is on the cusp of a mega merger cycle.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) in an in-depth analysis on the proposed merger said there was still room for mergers and acquisitions (M&As) and bank consolidations, driven by further liberalisation by Bank Negara Malaysia as well as the need for banks to build up their domestic or regional scales to remain relevant and competitive.
“The government has relaxed the foreign equity participation for Islamic banks, investment banks and insurance companies – up to 70 per cent foreign ownership – and recently, unit trust management companies (up to 100 per cent foreign ownership).
“For commercial banks, there is a 30 per cent limit on strategic foreign shareholdings. If this cap is raised (possibly on a case-to-case basis), it could spark M&A opportunities among Malaysian banks or open doors for new strategic partnerships,” opined analysts Hon Seow Mee and Lin Sue Lin yesterday.
Banks such as AMMB Holdings Bhd, RHB Cap, Alliance Financial Group and Affin Holdings Bhd have foreign strategic shareholders with holdings ranging from 15 to 25 per cent, it said.
The analysts went on to highlight that competition is expected to continue to erode net interest margins (NIMs) and it will be increasingly challenging to enhance return on equities going forward.
Hence, it makes sense for banks to find good fits to strengthen their capabilities and franchises, and create synergies.
“Increasingly, M&As involving non-bank financial institutions, brokerage and insurance companies have dominated local news flow. Undeniably, scale and balance sheet strength are crucial for these businesses.
“After all that is said, we think there is still room for pure domestic banks or small niche banks to survive. Big is not necessarily better. At the end of the day, mergers must be synergistic and complementary.”
With this in mind, AllianceDBS Research pegged Public Bank Bhd (Public Bank) and Hong Leong Financial Group (HLFG) as its fundamental stock picks.
“We like Public Bank for its resilient earnings backed by steady loan growth momentum and robust asset quality, while its cost-to-income ratio remains the lowest among peers,” it explained, adding that the bank’s strong consumer franchise should defy the headwinds.
“Apart from its bread-and-butter business, there is room for non-interest income to expand, especially from bancassurance and unit trust (Public Mutual).”
The analysts believed a privatisation of HLFG, replaced by a possible listing of HLA Holdings, could be the next restructuring story in Malaysia.
“The privatisation of HLFG would unlock value in the financial holding company and allow investors to focus on the key operating entity, Hong Leong Bank, which contributes 90 per cent of HLFG’s group profits.
“It would eliminate administrative overlaps and reduce regulatory compliance costs within the group. But even without a potential privatisation, HLFG will continue to ride on HLB, which contributes 90 per cent of the group profits.”