Cathay Financial-Nova Scotia deal still on — sources

This article first appeared in The Edge Malaysia Weekly, on January 15, 2018 - January 21, 2018.
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IT has been just over seven months since Cathay Financial Holding Co, Taiwan’s largest financial group, agreed to acquire Bank of Nova Scotia Bhd (Scotiabank) for US$255 million last May, a move that would have made it the first Taiwanese group to own a bank in Malaysia. However, they have yet to carry out the deal.

According to sources, the two are still waiting for Bank Negara Malaysia to greenlight the proposed acquisition. Taiwan’s banking regulator, the Financial Supervisory Commission, had approved the deal last June.

The unusually long wait for the local central bank’s approval has sparked industry speculation on whether all is well and if the deal will proceed at all.

A source familiar with the situation, however, is confident that despite the delay — it was initially expected that the deal would close in the second half of last year — the acquisition will happen as planned, likely in the first half of this year.

“The parties are still in the process of getting Bank Negara approval. Yes, it’s taking some time, but you have to remember, this is not a domestic consolidation where the buyer knows the market well. This is a new player, so it takes time for it to put up a business plan and so on. But the process is going well ... the parties estimate deal completion in the first half of this year,” the source tells The Edge.

There are expected to be no changes to the pricing or structure of the planned acquisition, the source adds.

Under the May 27 agreement, Cathay Financial will acquire Scotiabank via its two wholly-owned subsidiaries, Cathay United Bank and Cathay Life Insurance Co, which are taking a 51% and 49% stake respectively in the Kuala Lumpur-based bank.

The US$225 million price tag valued Scotiabank at about 1.15 times its book value.

Low-key but profitable, Scotiabank, which has a 44-year history in Malaysia, is wholly-owned by Canada’s third largest lender by assets, Bank of Nova Scotia.

Scotiabank commenced operations in 1973, and became a locally incorporated entity in 1994. In 2007, it had as many as five branches in Malaysia, when it had a stronger focus on retail banking.

These days, it does mainly corporate banking, serving customers from its sole branch in Menara Hang Seng in Kuala Lumpur, two corporate sales offices in Johor Baru and Penang, as well as an offshore branch in Labuan. It had some 70 employees last year.

The Edge had reported in June 2016 that the Canadian group was exploring the sale of its Malaysian subsidiary as part of a wider plan to scale back in Asia to focus on domestic banking and certain key South American markets.

Based on the latest unaudited financial statements posted on its website, Scotiabank’s net profit for the nine months of its financial year ended Oct 31, 2017 (FY2017) fell by 10.1% to RM20.69 million. In the third quarter itself, however, net profit doubled to RM8.51 million from RM4.23 million.

It attributed the decline in the nine-month earnings to lower net interest income, on the back of lower interest-bearing assets held, and lower fee income earned during the period, which was partially offset by a reduction in operating expenses.

The group’s assets, at RM2.91 billion as at end-July last year, had decreased by 16.4% compared with RM3.48 billion nine months earlier. The size of its gross loan book fell to RM1.9 billion from RM2.14 billion.

“It’s been business as usual at Scotiabank, but perhaps at a lower pace of activity. Their core activity is corporate banking, and their clients are still with them. But their challenge now is getting new business while they are in (ownership) transition. It could lead to a situation where the financial performance deteriorates,” another source tells The Edge.

In FY2016, its audited net profit stood at RM20.88 million, a sharp drop from the RM48.09 million it made in FY2015.

To Cathay Financial, the real value in buying Scotiabank is the latter’s banking licence. Commercial banking licences are hard to come by in Malaysia — the last time Bank Negara issued such licences was in 2010, to five foreign financial groups.

“Bank Negara isn’t giving out licences anymore, so there is a scarcity value involved — I don’t think Cathay Financial overpaid. I think they are paying a fair price to get into one of the most attractive markets in Asean,” the earlier source opines.

There are currently 19 licensed foreign commercial banks in Malaysia — but none so far from Taiwan. Taiwanese banks are increasingly looking abroad to grow income, given intense competition at home, and have been eyeing stakes in Asean lenders.

Cathay Financial already has a 22.7% stake in the Philippines’ Rizal Commercial Banking Corp and 40% in Indonesia’s Bank Mayapada Internasional.

The group focuses on corporate, retail and SME banking in the region.

In 2016, another Taiwanese financial group, CTBC Financial Holding Co Ltd, tried to enter the Malaysian market but failed.

CTBC had agreed to buy The Royal Bank of Scotland Bhd for US$189.7 million, or 0.95 times the latter’s book value, but called off the purchase four months later in August, citing slow progress on the planned acquisition.

The Edge reported last year, citing sources, that the deal failed because of regulatory delays in Taiwan after CTBC’s major shareholder, Jeffrey Koo Jr, and other executives got into trouble in Taipei over alleged illegal financial dealings and embezzlement involving the conglomerate.

RBS Malaysia, a profitable entity, then went on to wind down its operations in the country. Its loss-making UK-based parent company RBS Group had been seeking to exit a number of markets globally, including Malaysia, either through outright closures or sales.

 

 

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