Fitch: MBSB will result in asset quality weakness in merged mega bank

Fitch: MBSB will result in asset quality weakness in merged mega bank
By Wei Lynn Tang / TheEdge Markets.com | October 14, 2014 : 9:12 PM MYT

KUALA LUMPUR (Oct 14): Fitch Ratings is of the view that Malaysia Building Society Bhd (MBSB) ( Financial Dashboard) will result in potential asset quality weakness in the merger between CIMB Group Holdings Bhd (CIMB) ( Financial Dashboard), RHB Capital Bhd (RHBCap) ( Financial Dashboard), and the lender.

Commenting on the merger, the rating agency cautioned that the merged entity’s asset quality was likely to deteriorate “slightly” in the near term, due largely to the inclusion of the smaller non-banking institution, MBSB, and its higher risk profile.

While unsecured personal lending makes up the bulk of MBSB’s loan portfolio, Fitch however noted that the overall impact on the merged entity’s loan quality should be “relatively limited”, as the company will only make up around 8% of the overall loan portfolio of the newly-merged entity.

Fitch noted in a press statement today that if the deal goes through, cost synergies are likely to materialise only over the long term.

It said although CIMB has a track record in managing earlier acquisitions, the successful execution for this proposed merger remains uncertain, given the larger scale of the transaction.

“Furthermore, being the country's largest bank with over 500 branches after the merger, will mean that extracting synergies will require rationalisation of staff, and may face political hurdles,” Fitch added.

The ratings agency believes that this merger may spur further consolidation in the Malaysian banking sector.

“No other proposed deals have yet been suggested, while additional tie-ups would be in line with the central bank's Financial Sector Blueprint to build larger and more efficient Malaysian financial institutions, better capable of competing in the wider region,” it said.

Nonetheless, Fitch noted that a success transaction will produce a Top five ASEAN bank, which would be in a better position to grow regionally, with the larger scale of its domestic operations.

Additionally, it said the impact on CET1 capital — which measures a bank’s financial strength — is likely to be limited, as the transaction between CIMB and RHBCap will be done through a share swap.

On a pro forma basis, Fitch estimates the new banking group’s CET1 capital to be around 9%, down from 9.5% reported by CIMB Group as at end June this year.

“Management has highlighted the target of 9.5%, and may look to replenish capital if the ratio falls below 9.0% — potentially through asset disposals,” Fitch said.

To recap, the merger will see a share swap between CIMB and RHBCap, at an exchange ratio of 1.38 (1 RHBCap share for 1.38 CIMB shares).

Based on a benchmark price of RM7.27 per CIMB share and RM10.03 per RHBCap share, this translates to price-to-book ratios of 1.7 times and 1.44 times for CIMB and RHBCap respectively, as at June 30, 2014, the banks announced on Oct 9.

Post-merger, CIMB shareholders will own 70% of the merged CIMB-RHB Group, and RHBCap shareholders the remaining 30%.

The merger remains subject to the approval of the regulatory authorities and the respective shareholders of CIMB and RHB, with completion expected in mid-2015.