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Moody's: Merger Credit Positive For RHB, MBSB, But Uncertain For CIMB
In its just released Issuer Comment, the rating agency said CIMB, RHB and MBSB had entered into a 90-day exclusivity agreement to discuss a merger of their businesses, after receiving regulatory approval to do so.
Moody's said the merger would be credit positive for RHB and MBSB because their credit profiles would likely benefit from CIMB's support and being part of a larger and financially stronger banking group.
It said RHB's standalone credit quality would also benefit from CIMB's larger distribution network and stronger funding profile.
The deal would also be credit positive for CIMB as it would enhance its scale of operations, although the extent of the benefits would depend on the execution of the merger and the transaction terms.
Moody's said the combination of the three financial institutions would create Malaysia's largest financial group by assets, with total consolidated assets of RM614 billion (US$188 billion).
This would be larger than Malayan Banking Bhd which has been the leader in terms of banking assets, loans and deposits.
From a standalone credit perspective, RHB Bank Bhd, RHB's main operating bank, is weaker than CIMB, whose largest banking subsidiaries are CIMB Bank Bhd which constituted 81 per cent of the group's assets at the end of March 2014, and PT Bank CIMB Niaga Tbk at 17 per cent.
MBSB also looks weaker than CIMB, with an impaired loan ratio of 7.6 per cent at the end of March 2014, versus CIMB's 3.1 per cent and RHB's 2.5 per cent.
Moreover, MBSB's impaired loan coverage ratio was 67 per cent and RHB's was 68 per cent, both lower than CIMB's 84 per cent.
And the percentage of cheaper current and savings account deposits in the deposit mix was 0.4 per cent for MBSB and 24 per cent for RHB, compared with 36 per cent for CIMB.
Adding RHB's and MBSB's operations, whose combined total assets equal 61 per cent of CIMB's assets, would enhance the scale of CIMB's operations in Malaysia and Singapore.
It gives CIMB access to customer and product segments with which RHB has stronger ties, such as the mass-market consumer segment in Malaysia and middle-market investment banking segment in Southeast Asia.
If CIMB integrates RHB and MBSB into CIMB, Moody's said it will consider the speed with which the banks formally merge, their plans to reduce combined costs, the revenue synergies they realise.
Moody's noted that CIMB had completed several bank integrations with much success, and this experience would mitigate the challenges that it would face in the restructuring and harmonisation of the acquired operations.
It said the transaction's credit implication for CIMB will depend on its form (a share swap or a combination of equity and debt), and the valuation of the transaction owing to the potential creation of goodwill.
At the end of March 2014, CIMB's CET1 ratio was 9.6 per cent, including the RM3.55 billion (US$1.09 billion) in equity it raised in January, which is lower than the industry average of 12.1 per cent.
Accordingly, the rating agency said the transaction will negatively affect CIMB's credit strength if its post-transaction CET1 ratio declines materially from current levels.
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