As deadline looms, MIDF and Al Rajhi scramble to reach merger deal

This article first appeared in The Edge Malaysia Weekly, on June 3, 2019 - June 09, 2019.
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WITH a June 27 deadline looming, Malaysian Industrial Development Finance Bhd (MIDF) and Al Rajhi Banking & Investment Corp (M) Bhd (Al Rajhi Malaysia) are scrambling to reach a merger deal, sources say.

Five months since announcing their intent to merge, the two financial institutions are still in the process of conducting a due diligence, raising doubts in the market as to whether they will be able to meet the deadline set by Bank Negara Malaysia to complete negotiations. The deadline had already been extended once before.

According to sources, both parties are still keen to see a merger through. Consulting firm Bain & Co Malaysia is expected to be hired as one of their advisors.

“They are still at the due diligence stage. Both sides are now going through all the information and everybody is rushing to meet the deadline. The banks’ [respective] shareholders are in the process of hiring Bain & Co to help with the business strategy for the merged entity as they have to present this to Bank Negara in the next one or two weeks,” a source told The Edge last week.

MIDF’s sole shareholder is Permodalan Nasional Bhd (PNB). Al Rajhi Malaysia is owned by Saudi Arabia-based Al Rajhi Bank, the world’s largest Islamic lender by assets.

It is understood that JPMorgan is PNB’s adviser for the merger while Al Rajhi Malaysia is being advised by Hong Leong Investment Bank in Singapore.

It was on Jan 10 that MIDF first announced that it had Bank Negara’s approval to embark on merger talks with Al Rajhi Malaysia. The parties were originally given three months, until late March this year, to hold discussions. Unable to come up with a deal by then, they asked Bank Negara for more time and were given an additional three months to June 27.

Sources say it is unlikely that Bank Negara will grant them another extension. As this is a holiday-shortened week because of Hari Raya, MIDF and Al Rajhi Malaysia have less than three weeks to come to a deal.

Al Rajhi Malaysia’s CEO Steve Chen, when contacted by The Edge, confirmed that the due diligence process was still ongoing, but declined to say more. MIDF CEO Datuk Charon Wardini Mokhzani declined comment.

According to sources, Al Rajhi Bank’s chief executive, Steve Bertamini, is keen for the merger to happen before his contract comes to an end later this year.

The union will help Al Rajhi Malaysia strengthen its position in Malaysia. The Islamic lender has struggled to make strides here on its own ever since it set up operations in October 2006.

“The Saudi bank has invested more than RM1 billion on the Malaysian unit, and it must be frustrating to see paltry returns after so long as this is such a competitive business. The [latter]’s cost of funds is high,” an industry observer remarks.

The Edge, in its March 18 issue, reported that the merger will likely be an all-share deal as the Saudi bank wants to stay on as a shareholder in the enlarged entity. It is not looking to exit. PNB is widely expected to be the largest shareholder in the merged entity.

As for MIDF, the merger will help the development financial institution become an Islamic bank. MIDF already does some Islamic financing but there are limits to what it can do without a licence. For example, it cannot collect retail deposits — one of the cheaper sources of funding for regular banks.

Neither MIDF nor Al Rajhi Malaysia are public-listed entities, but it is believed that MIDF may be keen to return to the stock market. It used to be a listed entity before PNB took it private.

If merged, the two financial institutions would have combined assets of about RM14.09 billion — still small, by industry standards. As a matter of comparison, Bank Islam Malaysia Bhd, the largest stand-alone Islamic bank, has RM59 billion in assets.

Al Rajhi Malaysia and Kuwait Finance House (M) Bhd are currently the only two remaining banks with Middle Eastern roots in Malaysia.

Al Rajhi Malaysia is bigger than MIDF in terms of assets and profitability. The bank, with assets of RM7.79 billion, made a net profit of RM18.49 million for the nine months to Sept 30, 2018, almost three times more than RM6.43 million a year ago. It has shown an annual profit every year, albeit small, since 2009.

MIDF slipped to a net loss of RM21.49 million in 9MFY2018 from a net profit of RM40.52 million a year ago due to higher expected credit loss allowance on loans, financing and advances as well as financial instruments. This came about after the new MFRS 9 accounting standard kicked in last year.



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