Be cautious of risks involved in Malaysian bank mega-merger: Fitch

The ambitious venture brings challenges.

The proposed merger of CIMB, RHB and Malaysia Building Society (MBSB) is ambitious, and will bring inherent challenges and risks for the new banking group amid a complex integration process.

According to a release from Fitch Ratings, cost synergies will exist but may be challenging to extract in the short term; and the merger could weaken capital buffers for CIMB if not funded by sufficient new equity.

The new proposed group would stand out as the largest bank in Malaysia and the fourth-largest lender in south-east Asia, with total assets of USD194bn and a 23% market share of domestic loans versus Maybank's 18%.

The release also said that the resulting additional scale will present opportunities for synergies at a time when growth prospects in the Malaysian financial system are coming under pressure due to high leverage.

Further, Fitch Ratings noted that this is the second attempt at a merger between CIMB and RHB in three years, and is in line with the central bank's "2011-2020 Financial Sector Blueprint", which aims for further consolidation.

Fitch also believes that this will not be an easy merger process - notwithstanding CIMB's experience in dealing with previous acquisitions.

Here's more from Fitch Ratings:

Furthermore, weakening credit growth and asset-quality pressures in the overall banking system will not make the process any easier.

Combining entities as large as CIMB and RHB will be lengthy, and the addition of MBSB is likely to make the integration even more complex.

The inclusion of the smaller building society is surprising, as it has a significantly different business mix with over 70% of gross loans in higher-risk personal unsecured lending - a segment where there are concerns about over-indebtedness.

MBSB's small branch presence means it relies on government and corporate deposits, mostly fixed term.
It does bring greater scale to CIMB's Islamic banking franchise, although it is unclear if the new group would be able to harness the building society's predominantly domestic, retail operations to further its international Islamic banking aspirations.

There would be significant network overlap at the combined entity, with close to 550 branches in Malaysia, compared with 399 at Maybank - currently the largest bank.

There may therefore be substantial opportunities for cost improvements in the merged entity.

However, the ability to extract these cost synergies may be a hurdle in the near term as it would largely depend on rationalising branches and staff, which could be politically unpalatable.