Malaysia bank merger plan may fall short

KUALA LUMPUR, JULY 31: The Malaysian central bank's plan to consolidate the country's financial sector is much needed, but may not yield ...

KUALA LUMPUR, JULY 31: The Malaysian central bank’s plan to consolidate the country’s financial sector is much needed, but may not yield the desired results, banking analysts say. The aim of the plan, under which banks have to identify merger partners by the end of September, is to help create big, strong institutions capable of withstanding international competition.

Experience last year, however, when the central bank, Bank Negara, tried to force marriages among finance companies, shows resistance from institutions’ owners might make the plan fall short of its specific goals for reducing numbers. And analysts also said the government had set an unrealistic timetable and the new consolidated groups might not perform as efficiently as the plan assumes.

Bank Negara announced on Thursday it wants to cut the number of commercial banks to six from 21, finance companies to six from 25 and merchant banks to six from 12. In the exercise last year, 39 finance companies were to be reduced to six through mergerswith six anchor firms, mergers with parent banks or closure of foreign bank-owned finance companies.

While the latter two plans were more or less completed, many independent finance companies used the stresses of the country’s first recession in 14 years as an excuse to call off their mergers.

Moreover, recapitalisation of financial institutions and takeover of their non-performing loans initiated by two government restructuring agencies afforded finance companies the ability to survive without the help from bigger, stronger companies. That history does not bode well for the new plan, some analysts said.

"The consolidation is needed, but whether the approach undertaken by the central bank works or not remains to be seen," said Peck Boon Soon, banking analyst with PB Worldsec Securities.

"They should be able to achieve it, but when you look at their experience with finance companies, unless Bank Negara comes out with some big stick like revoking their licences I don’t think it is going to happen," hesaid.While Bank Negara’s announcement said banks were required to agree to the programme it did not specify what the penalties might be if they failed to follow through. Analysts also said the time given for banks and other institutions to identify suitable partners and sign agreements to merge was too short. "Consolidation is a theme I have (always supported), it will happen, it is a question of how long it takes," said Tay Chin Seng, regional banking analyst with ING-Baring in Singapore.

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"There are going to be integration problems. You are not just merging two balance sheets, but merging two cultures," he said. Cultural differences could weaken large, strong banks that take over weak, small banks, analysts said.

"Merging is not as simple as big is beautiful. If the top five banks take over the rest, they will be taking over a lot of inefficiencies, different risk management structures, levels of prudence and reporting lines," said Phua Lee Kerk, head of research at Jupiter Securities. Almost allanalysts agreed on what top five banks would remain if the plan goes through, saying the sixth one could be any of several permutations and combinations possible.

They said Malayan Banking, the country’s biggest bank; the merged Bank of Commerce and Bank Bumiputra; RHB Bank, which recently took over Sime Bank to become the third biggest in terms of assets; Public Bank; and Arab-Malaysian group would be the survivors.

A sixth anchor among banks could be the merged Southern Bank and Ban Hin Lee Bank, the merged Perwira Affin Bank and BSN Commercial Bank (Malaysia) or the restructured Multi-Purpose Bank, which is being taken over by Malaysian Plantations.