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Implications of RHB Bank’s second merger attempt failure

 | August 24, 2017

The failure of the proposed RHB-AmBank merger, a sign of Malaysia’s fragmented financial industry, may invite China’s financial services companies to move in.

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ambank-rhb-1By Gadfly (Bloomberg)

Banking consolidation in Malaysia is proving to be fiendishly tough. Blame it on a runaway bride, but leave room to lament the country’s fraught racial relations.

Start with the Julia Roberts character. RHB Bank Bhd, Malaysia’s fourth largest by assets, has now been involved in two failed marriage discussions.

The first – a three-way merger with CIMB Group Holdings Bhd and Malaysia Building Society Bhd – collapsed in early 2015. The second, in which it wanted to join hands with AMMB Holdings Bhd., was called off Tuesday after the parties disagreed on terms.

Without more details, it’s hard to say if it was Aabar Investments PJSC, RHB’s second-largest shareholder, playing spoilsport again. Considering that the unit of Abu Dhabi’s sovereign wealth fund wasn’t keen to sell at the price CIMB was offering, it may well have been eager to buy AmBank, as AMMB is known to be on the cheap.

The Employees Provident Fund of Malaysia, which owns almost 41% of RHB, can’t influence a sale because it also has a 10% interest in AmBank, and hence can’t vote in any related-party transaction.

That was one reason Gadfly was skeptical of the marriage, which had the central bank’s blessing. Besides price, cost savings may also have played a role. With elections around the corner, there wouldn’t have been much appetite for large-scale bank layoffs.

The botched deal also means that Malaysia’s fragmented financial industry – the last big banking consolidation was almost two decades ago – will continue to drag on competitiveness. As Gadfly noted recently, a prolonged period of sub-par deposit growth in the country is pushing up lenders’ funding costs.

The other implication of the failed merger is for Australia & New Zealand Banking Group Ltd. The CEO, Shayne Elliott, having sold the bank’s retail and wealth-management franchise in Singapore, Hong Kong, China, Taiwan and Indonesia to DBS Group Holdings Ltd, would have loved the chance to offload ANZ’s 24% stake in AmBank to focus on his core domestic business.

For now, it looks like that isn’t to be, unless ANZ first buys out the provident fund’s stake, leaving it free to cast its vote as the largest shareholder of RHB. But going in deeper to get out could backfire.

Finally, nothing in Malaysia is without a racial dimension, and that includes banking.

AmBank started out as Arab-Malaysian Development Bank in 1975; the lender dabbles in both Islamic and conventional finance and got caught up in last year’s 1MDB money-laundering scandal, much to ANZ’s embarrassment. It became a takeover target after controlling shareholder Azman Hashim expressed a desire to hang up his boots.

The other tycoon who wants to retire is Teh Hong Piow, the founder of Public Bank Bhd. His is by far the best-run lender, though also the most expensive. If a non-Chinese Malaysian financial institution tries to buy it, the bank’s core Chinese customers might flee to Quek Leng Chan’s Hong Leong Bank Bhd.

Something’s gotta give: Malaysia needs fewer, bigger banks. The Chinese tech trinity of Baidu Inc, Alibaba Group Holding Ltd and Tencent Holdings Ltd, are circling Southeast Asia; their e-commerce ventures will come first, but their payment solutions and wealth-management products won’t be far behind.

Singapore is taking this threat seriously. Malaysia should too.

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