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

Commenting on the merger, the rating agency cautioned that the merged entity’s asset quality is 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 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 statement yesterday that if the deal goes through, cost synergies are likely to materialise only in 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 said.

The rating agency believed 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 capable of competing in the wider region,” it 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). Post-merger, CIMB shareholders will own 70% of the merged CIMB-RHB group, and RHBCap shareholders the remaining 30%.

This article first appeared in The Edge Financial Daily, on October 15, 2014.