SINGAPORE (Jan 15): The cancellation of a proposed merger of CIMB Group Holdings Bhd (fundamental score: 1.35; valuation score: 2.1), RHB Capital Bhd (RHBCap) (fundamental score: 1.5; valuation score: 2.1) and Malaysia Building Society (MBSB) to form a mega bank, underscores the inherent risks related to such a tie-up amid a weakening operating and economic environment, resulting in slower growth and banking sector asset quality pressures, said Fitch Ratings.

“Fitch maintains that the merger process would have been lengthy, and the inclusion of MBSB would have made the integration even more challenging, owing to the building society's significantly different business mix, compared with CIMB and RHBCap,” wrote the rating agency in a report released today.

“This is especially the case, given the high levels of household debt in Malaysia and an increasingly challenging operating environment — including slower credit growth and potentially deteriorating asset quality — for the banking sector as a whole,” it added.

Meanwhile, Fitch said the macroeconomic outlook for Malaysia has grown less certain, amid the recent sharp falls in the price of crude oil, as the country is a net oil exporter.

The rating agency further said that MBSB's (fundamental score: 1.2; valuation score: 2.4) focus on higher-risk personal unsecured lending — one of the areas most sensitive to a weaker environment — would have raised the risk profile of the new entity, had the merger gone through, even though it believes the Malaysian banks are well-placed to meet the challenges, with strong loss absorption buffers.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)