Mega Islamic bank to start on hybrid model

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THE mega Islamic bank that is created from the proposed merger of CIMB Islamic Bank Bhd, RHB Islamic Bank Bhd and Malaysia Building Society Bhd (MBSB) will start off on a “hybrid” business model but may eventually run as a standalone bank to garner wider international appeal, sources say.

A hybrid model means it will leverage its conventional banking parent’s branches — the way most domestic Islamic lenders currently do — and also have its own branches such as standalone banks Bank Islam Malaysia Bhd and Bank Muamalat Malaysia Bhd.

Islamic lenders here usually operate either on a leverage or standalone banking model — rarely a combination of both.

“The plan is for the mega Islamic bank to eventually move towards a standalone model. The bank obviously cannot start off as a standalone on Day 1. But over time, it will do less of the leverage model and more of the standalone. This was what the parties proposed in their submissions to Bank Negara Malaysia,” a source tells The Edge.

It was proposed that the bank take 12 to 16 months to move towards standalone basis, the source says. “But these things are fluid, so the timeline can change — it can be faster or slower.”

It is understood, however, that the parties involved in the merger are still discussing the business model as there are many issues to consider. They aim to ink a definitive agreement only early next year.

The Islamic finance industry will no doubt keep a close eye on the type of business model the mega Islamic bank will eventually employ. The industry has long debated about the standalone versus the “leverage” banking model, with Islamic banking purists saying the leverage model is not truly Islamic given that it leverages on the conventional bank’s infrastructure and resources.

“In order to have the full respect of the world Islamic banking community and to reflect the aspirations of the country [to be a global leader in Islamic finance], there’s no question about it — the mega Islamic bank has to be run as a standalone, seeing to its own operations, risk management, marketing and so on. If you look at some of the Gulf countries, they don’t even recognise the leverage model,” the CEO of a local Islamic financial institution tells The Edge.

Critics, however, say it will be more costly for the banks to run separate platforms for conventional and Islamic banking. The hybrid model is not cost efficient unless there are strong business volumes to support it, observes a banking analyst.

Interestingly, when RHB Islamic first started out, it tried to be different from rivals by operating the hybrid model. It eventually decided to move to the leverage model to lower costs.

“RHB Capital Bhd (RHBCap) tried to differentiate itself by doing a hybrid. It built a standalone Islamic bank with its own distribution in 14 locations. Certainly, that wasn’t enough to compete against the 200-plus RHBCap locations. We ended up building a large cost base … the volumes were not high enough and the performance wasn’t fantastic.

“Because there wasn’t a consolidated strategy to drive it, there was internal competition between the conventional and Islamic banks. What we have done to correct that is, we have leveraged it and brought it back closer to how Maybank (Malayan Banking Bhd) and CIMB will look at it,” RHBCap group managing director Kellee Kam said in an interview with a business daily in January this year.

Still, the banking analyst agrees that to gain international acceptance, especially from the Gulf countries, the mega Islamic bank has to be a standalone and as such, it makes sense to start off on the hybrid model first.

The mega Islamic bank will be a subsidiary of the enlarged banking group that is created from a proposed merger among CIMB Group Holdings Bhd, RHBCap and MBSB.

Once CIMB and RHBCap are merged, their respective Islamic banks — CIMB Islamic and RHB Islamic — will combine with MBSB to form the mega Islamic bank. Essentially, this will involve RHBCap’s Islamic banking business being sold to CIMB Islamic, which will then acquire all of MBSB’s assets and liabilities at a price of RM2.82 per MBSB share.

MBSB shareholders will have the option of receiving cash or shares in CIMB Islamic, the newly created mega Islamic bank. MBSB will eventually be delisted from the Main Market of Bursa Malaysia.

CIMB, at an analyst briefing last Tuesday, revealed that the enlarged conventional banking group intends to hold just 51% to 60% equity interest in the mega Islamic bank and that it has identified several other strategic shareholders that could subscribe to a stake in the entity as well.

There is a local and foreign party each that could take up a stake in the Islamic bank, a source tells The Edge.

“One of the obstacles to listing the mega Islamic bank is the leverage model and the fact that the listed entity would have to deal with the issue of related-party transactions. Nevertheless, with strategic shareholders in place, management will have a grace period of three to five years to strengthen the Islamic bank and to get the strategy right,” Maybank Investment Bank Research banking analyst Desmond Ch’ng says in an Oct 29 report following the CIMB analyst briefing.

He notes that some of the additional branches from the merger will be transferred to the mega Islamic bank, which may absorb some of the additional staff count as well. As at end-2013, CIMB, RHBCap and MBSB had a combined 553 branches.

“Assuming that Maybank’s network (of 399 branches) is the ideal size, then the enlarged entity would have just over 150 excess branches. Management envisages closing just 40 to 50 branches, so this would imply that the Islamic entity would have about 100 to 110 branches,” Ch’ng observes.

Ironically, despite the merger parties referring to the soon-to-be-created Islamic entity as a “mega” Islamic bank, it is actually smaller by asset size compared with Maybank Islamic Bhd. Maybank Islamic is the largest Islamic lender in Asia-Pacific.

“It’s ‘mega’ not necessarily by size, but by its expected ability to do business in a much bigger way beyond Malaysian shores ... the ability to penetrate the US and Europe. To do that, you need a sizeable amount of capital and the right support from shareholders, not to mention having the right products and know-how. These are the things that will give it ‘mega’ status,” a source explains.

The mega Islamic bank is also expected to be more innovative in terms of business and product offerings, the source adds.

Of the three Islamic entities, CIMB Islamic is the largest by asset size. However, non-bank lender MBSB is the most profitable and fastest growing in recent years, with a profit of RM597.57 million last year.

They will have a combined asset size of RM113.8 billion compared with Maybank Islamic’s RM125.01 billion as at end-2013.

It should be noted also that not all of MBSB’s RM35.25 billion assets are shariah-compliant assets, with about 15% to 20% of it said to be conventional. The group is understood to be in the process of trying to restructure as much of these to Islamic.

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This article first appeared in The Edge Malaysia Weekly, on November 03 - 09, 2014.