Friday 29 Mar 2024
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Malaysia’s financial sector has undergone a major transformation since the 1997/98 Asian financial crisis. At the core of this was a government-driven, industry-wide consolidation via mergers and acquisitions (M&A) in 1999, where some 23 banks were eventually reduced to 10 by the early 2001/2. 

Sixteen years after the crisis, Malaysia is left with eight banking groups as the industry consolidates further. The number will be reduced to seven if the proposed RHB Bank-CIMB Bank-Malaysia Building Society Bhd (MBSB) merger is successfully concluded. As at press time, the three parties have come to an agreement and submitted a proposal to Bank Negara Malaysia for approval. 


The proposed merger will involve a three-step process. First, CIMB Bank will merge with RHB Bank, with the latter acquiring CIMB shares in a share swap. CIMB Group Holdings Bhd will emerge as the biggest shareholder in the merged entity with a 70% stake, while RHB Capital Bhd will end up with 30%. 

The second step will be a merger of the Islamic arms of CIMB and RHB. Then, the newly merged entity will merge with MBSB to form the largest Islamic bank in Malaysia. Putting together the deal and coming to an agreement on the structure is only the first hurdle — the proposal will have to be approved by the regulators and eventually, the shareholders. The whole exercise is scheduled to be completed by January 2015.

This mega bank merger will create the country’s largest banking group, displacing Malayan Banking Bhd (Maybank). It will be the fourth largest bank in Southeast Asia, with total assets of US$194 billion (RM633.3 billion). 

There are expectations the RHB Bank-CIMB Bank-MBSB merger will spark another round of M&A in the local banking sector. There’s talk that banks such as AmBank, Affin Bank and Alliance Bank could be involved in the next round of consolidation. All this could leave Malaysia with five banking groups, excluding Islamic banks and foreign banks. The question is, will these bank mergers be good for all stakeholders, including the man in the street? 

The answer, industry experts and bankers say, depends on where one is coming from. For investment banks, it is great because they can earn huge fees for putting the mergers together. In fact, some of them already see the potential and have gone to some of the other banking groups to pitch merger proposals. 

For the banks involved, economies of scale are always an advantage when competition heats up and where technology and innovation increasingly decide who will win the game. Banks need deep pockets to go up the IT ladder and this is where size and financial might come in.

Bank consolidation to create financially sound institutions, as a whole, is beneficial to the industry and the public. That is why in many countries, such as Sinagpore and the UK, the number of banks has been reduced to just a handful. 

In fact, the 1999 consolidation in Malaysia created a banking sector that was more resilient and less vulnerable to financial crises. This was proved during the 2008 global financial crisis. While the big Western banks took a hit, Malaysian banks came out of the crisis relatively unscathed.


The question now is whether an even smaller number of banks is a good thing. A lesson learnt from the 2008 global financial crisis is that big is not always beautiful. And there will always be room for niche banks. The collapse of US financial juggernaut Lehman Brothers in 2008 and its contagion sent shock waves across global financial markets. Stock markets crashed and the US financial system was almost brought to its knees.

While Lehman was allowed to fall, a massive bailout programme was undertaken by the other big players, such as AIG and Bank of America, costing US taxpayers some US$300 billion, according to news reports. “Too big to fail” became a catchphrase associated with the 2008 crisis.

What about consumers?

“Too big to fail” will have implications for consumers when taxpayer money is used to bail out troubled banking institutions.

Industry experts say banking mergers, or any merger for that matter, should be viewed from three perspectives: prudential safety, competition and public interest.

Studies in developed countries have shown that public interest is not always a priority when regulators assess whether to give the green light or not.

Certainly, in Malaysia, banking mergers almost always involve some form of retrenchment. In recent times, to be politically acceptable, the merged banks have introduced voluntary separation schemes (VSS) and mutual separation schemes (MSS). Such schemes are not carried out immediately after a merger but tend to take place a year later or so when the integration is well on the way and the bank has a better idea of the extent of the excess in the workforce and number of overlapping branches.

CIMB, for example, said in 2009 that it would close 60 branches following its merger with Southern Bank Bhd in 2006. Branch closures inevitably result in redundancies.

The National Union of Bank Employees (NUBE) has already articulated its concerns that the RHB Bank-CIMB Bank-MBSB merger will result in a VSS or MSS as the two banks have quite a number of branches in the same location. Together, the merged entity will have 550 branches, compared with Maybank’s 399.

The thinking is that bigger banks will result in greater efficiency and lower costs, which should translate into better services and cheaper financial products for consumers. However, industry experts say there was no hard evidence of this after the 1999 consolidation exercise. 

Indeed, if we compare the pricing of loans, whether mortgage or hire purchase, there is very little difference across the eight banking groups. Additionally, if we look at the fixed deposit and savings rates, the difference is also minimal.

In fact, in the UK and Canada, M&A in the banking sector have become a major point of debate, focusing on whether they result in an oligopoly, or a concentration of pricing power in the hands of a handful of financial institutions.

There is a large number of banks, local and foreign, in Malaysia. Even so, industry observers say oligopolistic traits seem to be setting in, especially in how banks set interest rates. A complex monopoly develops when a group of two or more banks controls at least 25% of the market and prevents, restricts or disturbs the competition.

Malaysia’s big three banks — Maybank, CIMB Bank and Public Bank — command a more than 25% of the loans market. It is estimated that the RHB Bank-CIMB Bank-MBSB merger would give it a 23% share of the domestic loans market — and a lot of pricing power in the space.

A few years ago, the mortgage segment became very competitive and a “price war” took place. At the time, industry observers said some of the banks were concerned about price undercutting and efforts were made to stop the price war.

Hence, creating bigger banks is not necessarily beneficial to consumers, as it reduces choice and competition. The experience in other countries is that this especially impacts the small and medium enterprises, which have always faced difficulties in getting bank funding.

In Malaysia, because of the huge presence of foreign and Islamic banks, customers have ample choice when it comes to banking services. However, if the number of local banks continues to shrink, this may no longer be the case, and the whole game could be played differently.

This article was first published in the November 2014 issue of Personal Money.

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