Nazir’s dream of an Islamic megabank

Nazir’s dream of an Islamic megabank

The proposed merger of CIMB Group, RHB Cap and MBSB would create a market leader in Malaysia and turbo-charge Islamic finance in the region

Nazir Razak surprised several people when he announced earlier this month he was relinquishing his position as group chief executive of CIMB Group, Malaysia’s second-largest banking group, to focus on formulating strategies to bring the group to a new level.

But only a week later there was a merger proposal between CIMB Group Holdings Bhd, RHB Capital Bhd (RHB Cap) and Malaysia Building Society Bhd (MBSB). It is still early on, but Mr Nazir is creating a megabank that could challenge the market leader in the country, Malayan Banking Bhd group (Maybank).

The merger would create Malaysia’s largest banking group and the largest Islamic bank in the region.

The idea for the merger came about after CIMB Group got the mandate to be one of the bookrunners for the first Islamic finance sukuk raised by a sovereign in the Western world. Mr Nazir saw opportunities in Islamic banking, as Malaysia is one of the global leaders in this sector, recognised even be Middle Eastern players as a pioneer in sukuk.

Mr Nazir started off as an executive in the corporate advisory department of CIMB Investment Bank and subsequently became its chief executive at the tender age of 33. After 15 years as head honcho of CIMB, he moved to chairman, surprising some who felt he was too young to be a non-executive chairman. He is taking over from his mentor Md Nor Yusof, who is retiring but joining the group’s international advisory panel.The chairman has his critics, with some arguing he holds a commanding position in CIMB because of his father, Abdul Razak, and brother, Najib Razak, who is Prime Minister. But his backers note Mr Nazir has a reputation for pulling off big corporate deals.

Mr Nazir wanted to expand CIMB’s reach, and now the group, headquartered in Kuala Lumpur, has a presence in most Asean nations: Malaysia, Indonesia, Singapore, Thailand, Cambodia, Brunei and Vietnam. He has said by 2015 he wants to have a presence in Philippines and Myanmar as well. CIMB’s Thai operations already have a presence in Laos.

Beyond Asean, the group has a market presence in China, Hong Kong, Bahrain, India, Sri Lanka, Australia, Taiwan, Korea, the US and the UK.

Malaysia has also dreamed of creating an Islamic megabank, but who besides Mr Nazir can make this happen, asked a banker who requested anonymity.
One way to read the proposed merger is the Employees Provident Fund (EPF) is really the main driver because it has significant stakes in all three entities.

CIMB is majority owned by Khazanah Nasional Bhd, the government’s investment agency. The EPF is the major shareholder in RHB Cap, where it holds a 40.76% stake. The other major shareholders of RHB Cap are Abu Dhabi’s Aabar Investments PJSC with a 21.43% stake, and OSK Holdings Bhd with a 9.91% stake. The RHB Banking Group is the fourth-largest, fully integrated financial service group in Malaysia.

The EPF also has 64.7% equity in MBSB and is the second-largest shareholder in CIMB with a 14.46% equity stake after Khazanah.
Some analysts are speculating if the merger is completed, EPF will emerge as the largest shareholder in the megabank with more than a 25% equity stake.

RHB Cap had been reported as a takeover target as far back as three years ago, with both CIMB and Maybank suitors. Previous deals fell through because Aabar wanted a higher valuation.

Before the negotiating parties can even warm up their seats, Aabar is reportedly asking for RM 12 a share for its 21.43% equity stake. Abu Dhabi was alleged to have sent a special envoy to the Malaysian government to convey unhappiness over the merger, saying market forces should determine the best price for RHB shares.

Aabar acquired its stake in RHB Cap from its sister company, Abu Dhabi Commercial Bank PJSC, for RM 5.9 billion or RM 10.80 a piece in 2011, valuing RHB Cap at a hefty 2.25 times its book value then.

Assuming the deal is concluded at 1.70 times, RHB Cap’s share will be worth RM 11.40 per share, a 5.6% premium to Aabar’s cost of RM 10.80. Some bankers feel it is more likely to be a share swap between CIMB and RHB at a book value of 1.75 times and an outright buyout of MBSB.

The proposed merger was approved by the Malaysian central bank in 24 hours, an almost unprecedented speed.

There is also an exclusivity clause in the 90-day agreement, meaning there cannot be any competing bids for RHB Cap during this period, as bankers noted competitive offers would certainly materialise during this process. It also means minimal disruptions during negotiations, said an analyst.

Moody’s Investors Service commented that the merger would create Malaysia’s largest financial group by assets, with total consolidated assets of RM 614 billion. This would exceed Maybank (A3 positive, C/a3 stable1), which is the leader in banking assets, loans and deposits. Moody’s projects the merger would be credit positive for RHB Cap and MBSB. Maybank’s assets stand at RM 578 billion.

Some reports suggested the market value of the deal would be close to RM 90 billion and combined profits would exceed RM 7 billion, based on the bank’s latest figures.

Among Asean banks, Maybank is fourth with about US$40 billion of Tier l capital, while fifth-placed Public Bank has roughly half of Maybank’s capital with US$21.22 billion. CIMB is tenth on account of its domestic operations.

Do you like the content of this article?
COMMENT