Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly, on January 11 - 17, 2016.

A MAJOR issue being argued out in the proposed merger between Malaysia Building Society Bhd (MBSB) and Bank Muamalat Malaysia Bhd is who should be the controlling shareholder in the merged Islamic banking entity.

Both the Employees Provident Fund (EPF), which is MBSB’s largest shareholder with a 65% stake, and diversified conglomerate DRB-Hicom Bhd, which owns 70% of Bank Muamalat, want to be the controlling shareholder, sources say.

A merger between MBSB and Bank Muamalat would create the country’s largest stand-alone Islamic bank with some RM62.1 billion in assets. It would be the second largest Islamic bank after Maybank Islamic Bank Bhd.

“Both the EPF and DRB-Hicom want to be the controlling shareholder. A decision needs to be made by the end of this month. It’s unlikely MBSB will go into this merger if the EPF is not in control of the merged entity,” a source tells The Edge.

The parties involved in the merger talks have yet to meet this year as they are waiting for Bank Negara Malaysia to approve their application to extend the deadline to conclude their negotiations to Feb 2.

The central bank had originally given them three months up to Dec 30, 2015, to complete the negotiations. On Dec 23, MBSB had said in a stock exchange filing that it as well as DRB-Hicom and Khazanah Nasional Bhd — the holder of the remaining 30% stake in Bank Muamalat — had applied for a one-month extension.

As at last Thursday, approval was still pending. Sources, however, say they do not anticipate any problems getting the extension.

Based on the talks so far, the merger is likely to be effected via a share swap. It was initially expected that the shareholding structure of the merged entity would be such that the EPF ends up as the largest shareholder with a stake of up to 40% or so, with DRB-Hicom holding over 20% and Khazanah, about 10%.

“But it seems like DRB-Hicom wants the higher shareholding now,” the source says.

Banking sources say it makes more sense that the EPF/MBSB party be in control of the merged entity given that MBSB is about twice the size of Bank Muamalat in terms of assets.

Furthermore, over 80% of their combined revenue and profit before tax (PBT) would come from MBSB. MBSB’s PBT in its last financial year ended Dec 31, 2014, was RM932.56 million while Bank Muamalat’s profit before zakat and tax in its last financial year ended March 31, 2015, was about RM122 million. Based on these historical numbers, MBSB accounts for 88.4% of the combined profit.

“Moving forward, looking at the forecast numbers, most of the income [of the merged entity] is expected to come from MBSB’s assets. So, going by that, it doesn’t make sense for the entity to be under DRB-Hicom’s control,” the earlier source says.

Some analysts say, from a perception standpoint, the market is likely to have a more positive view of the EPF being the controlling shareholder. The EPF, with its deep pockets, is seen to be more able to support things like a capital call, if needed, than DRB-Hicom, which is currently struggling amid the weaker economy.

DRB-Hicom, controlled by businessman Tan Sri Syed Mokhtar Albukhary, recently reported a net loss of RM15.82 million for the six months ended Sept 30, 2015, compared with a net profit of RM200.93 million in the previous corresponding period, dragged down by its automotive and property sectors. Revenue also fell, by 10.7% to RM6.2 billion.

Bank Muamalat accounted for about 7% of DRB-Hicom’s RM13.687 billion revenue in the last financial year ended March 31, 2015.

DRB-Hicom had bought its 70% stake in Bank Muamalat from Bukhary Capital Sdn Bhd — also controlled by Syed Mokhtar — in a RM1.069 billion deal back in 2008. Bank Negara had allowed the deal, on condition that it would eventually pare down the stake. DRB-Hicom has been given several deadline extensions to do so.

Previous attempts to sell down its stake to several financial institutions, namely Affin Holdings Bhd, Bank Islam Malaysia Bhd and Bahrain-based Islamic lender Al Baraka, had failed. Industry sources say it had been difficult for DRB-Hicom to close a deal with any of the parties, for two reasons — it wanted to maintain control of the bank and its price expectations were deemed too high.

But it may just have its back against the wall now. The Edge reported in July last year that the central bank had given DRB-Hicom up to February 2016 — said to be the final extension — to pare down its stake in Bank Muamalat to at least 40%.

It will be interesting to see if DRB-Hicom can work out a deal with MBSB and the other parties over the next few weeks. Should they be able to do so, sources say the merger can be completed by October.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share