Volume 30 Number 4 2003

Mergers and Acquisitions of Banks in Malaysia

by Bala Shanmugam, Director of Banking and Finance Unit, School of Business, Monash University Malaysia, No.2, Jalan Kolej, Bandar Sunway, 46150 Petaling Jaya and Mahendran Nair, Head of School of Business, Monash University Malaysia, No.2, Jalan Kolej, Bandar Sunway, 46150 Petaling Jaya Abstract The recent wave of mergers and acquisitions in the financial institutions all over the developed nations has also taken its toll in Malaysia. Factors such as globalization, liberalization and information technology developments have contributed to the need for a more competitive, resilient and robust financial systems in Malaysia. This is added by the recent 1997 Asian financial crisis, which contributed for speeding the mergers and acquisitions process in the Malaysian banking sector. The end result is the formation of ten anchor banks from a total of 54 financial institutions as at end of 2001. This paper has explored the causes and the process of the mergers and acquisitions as well as the future implications in the Malaysian banking system. Introduction Mergers and acquisitions of banks are not exactly recent phenomena for Malaysia. As early as 1932, Malaysia (then known as Malay States) witnessed the merger of Ho Hong Bank, The Chinese Commercial Bank and the Oversea Chinese Bank to form Oversea Chinese Banking Corporation (OCBC). Also in the late 1960s, Hong Kong and Shanghai Bank had procured the whole share capital of the Mercantile Bank while Chartered Bank acquired the Eastern Bank (Drake, 1969). This has been an ongoing activity as warranted by market forces. The initial recent merger in the financial industry occurred in 1990 with the takeover of United Asian Bank by Bank of Commerce. This entity subsequently merged with Bank Bumiputra to form Bank Bumiputra Commerce on 1 October 1999. The second mergers saw the takeover of Kwong Yik Bank by Rashid Hussain Group in late 1996 to form RHB Bank; Sime Bank subsequently joined the RHB Group in June 1999. The central bank, Bank Negara Malaysia (BNM) has always encouraged such moves. However, the severity of the encouragement peaked following the Asian financial crisis. The Asian financial crisis of the late 90s revealed the extent of the vulnerability of financial institutions to exogenous factors. The capacity of financial institutions to absorb economic downturns was put to question. Economic theory suggests that a firms capital is supposed to act as a cushion to withstand losses. Hence the question of capacity to absorb losses was linked to capital size and in turn the overall size of the institution. The Central Bank, accordingly decided to force banks to merge. On 29 July 1999, BNM announced that there should only be six banks in Malaysia and they were termed as anchor banks: Maybank, Bumiputra Commerce Bank, Public Bank, Perwira Affin Bank and Southern Bank. Following much lobbying from various quarters against this decision the government decided to increase the number from six to 10. In February 2000, BNM announced a merger program for the creation of 10 anchor banking groups, which were to

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form the nucleus of the entire financial system. The program sought to reduce 54 financial institutions to 10. Causes of Merger In addition to the inherent weakness in the banking system detected during the financial crisis, there was an urgent need to accelerate the merging of the banking system in the face of a more competitive and globalized business environment. The need to merge was made all the more imperative given the increased pressure under the terms of an agreement, which was worked out under the auspices of the World Trade Organization that called for the liberalization of financial services from the year 2003. The crisis also demonstrated the vulnerabilities of the smaller banking institutions. These merged domestic banking groups would then be well positioned to meet the demands of the changing domestic economic structure and future challenges from globalization and liberalization. This entailed the opening up of domestic financial markets to global players, which had in turn led a number of countries (example Thailand, Indonesia, etc.) to announce or implement plans to consolidate their banking system. The latter plan was premised on the notion that larger and better-capitalized banking groups were more competitive and efficient and would therefore be more able to meet the challenges of a liberalized market place. BNM outlined the merger and acquisition processes as follows: 1. The need to structure the mergers in such a way so as to reap the maximum synergy from the merger so as to improve the profitability and efficiency of the proposed banking groups; The need to ensure minimal disruption in the provision of banking services following the rationalization of branches and employees; The need to minimize post-integration costs that may otherwise affect the viability of the merged entity; and The need to ensure that each banking group is of a sufficient size. In this regard, upon completion of the merger program, each banking group was to have a minimum shareholders funds of RM2 billion and asset base of at least RM25 billion. (BNM Press Release, 14 February 2000)

2. 3. 4.

Merging of the banking industry was said to integrate the entire banking sector by making it both more competitive and efficient. Such merging were best implemented when the banking system was fundamentally strong, as the costs associated with the same would be significantly lower than if the merging were proposed during times of crisis. However, it was also important that these mergers had to be implemented on a fair and equitable basis with maximum transparency so that it will be a win-win situation for all the participants. The greater efficiency was to come about through savings from a reduction in manpower and branch networks, as well as from an increased use of up-to-date information technology.

Table 1: Ten Banking Groups Merged With BSN Commercial Bank (M)Berhad BSN Finance Berhad BSN Merchant Bankers Berhad International Bank Malaysia Berhad Sabah Bank Berhad Sabah Finance Berhad Alliance Bank Berhad Alliance Finance Berhad Alliance Merchant Bank Berhad Affin Bank Berhad AFFIN ACF Finance Berhad Affin Merchant Bank Berhad Resultant Entity After Merger

Original Anchor Banking Group

1. Affin Bank Berhad Group Perwira Affin Bank Berhad Asia Commercial Finance Berhad Perwira Affin Merchant Bank Berhad

Volume 30 Number 4 2003

2. Alliance Bank Berhad Group Multi-Purpose Bank Berhad

Bolton Finance Berhad Amanah Merchant Bank Berhad Bumiputra Merchant Bankers Berhad

3. Arab-Malaysian Bank Berhad Group Arab-Malaysian Bank Berhad Arab-Malaysian Finance Berhad Arab-Malaysian Merchant Bank Berhad MBF Finance Berhad

Arab-Malaysian Bank Berhad Arab-Malaysian Finance Berhad Arab-Malaysian Merchant Bank Berhad Bumiputra Commerce Bank Berhad Bumiputra Commerce Finance Berhad Commerce International Merchant Bankers Berhad

4. Bumiputra Commerce Bank Berhad Group Bumiputra Commerce Bank Berhad Bumiputra Commerce Finance Berhad Commerce International Merchant Bankers Bhd

5. EON Bank Berhad Group EON Bank Berhad Oriental Bank Berhad

EON Bank Berhad EON Finance Berhad Malaysian International Merchant Bankers Berhad

EON Finance Berhad

EON Finance Berhad Perkasa Finance Berhad Malaysian International Merchant Bankers Berhad

Table 1: Ten Banking Groups Merged With Wah Tat Bank Berhad Credit Corporation (Malaysia)Berhad The Pacific Bank Berhad PhileoAllied Bank (M)Berhad Sime Finance Berhad Kewangan Bersatu Berhad Hock Hua Bank Berhad Advance Finance Berhad Sime Merchant Bankers Berhad Delta Finance Berhad Interfinance Berhad Public Bank Berhad Public Finance Berhad Public Merchant Bank Berhad RHB Bank Berhad RHB Delta Finance Berhad RHB Sakura Merchant Bankers Berhad Southern Bank Berhad Southern Finance Berhad Southern Investment Bank Berhad Malayan Banking Berhad Mayban Finance Berhad Aseambankers Malaysia Berhad Hong Leong Bank Berhad Hong Leong Finance Berhad Resultant Entity After Merger

Original Anchor Banking Group

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6. Hong Leong Bank Berhad Group Hong Leong Bank Berhad Hong Leong Finance Berhad

7. Malayan Banking Berhad Group Malayan Banking Berhad Mayban Finance Berhad Aseambankers Malaysia Berhad

8. Public Bank Berhad Group Public Bank Berhad Public Finance Berhad

9. RHB Bank Berhad Group RHB Bank Berhad RHB Sakura Merchant Bankers Berhad

10. Southern Bank Berhad Group Southern Bank Berhad Ban Hin Lee Bank Berhad United Merchant Finance Berhad Perdana Finance Berhad Cempaka Finance Berhad Perdana Merchant Bankers Berhad

Source: Bank Negara Annual Report 2001, p.111

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Merging to Ten Banking Group

As at 31 December 2001, 52 of the 54 banking institutions had been merged into 10 banking groups. The central bank's consent to the new groupings was in the view that it might pave the way for a strong, efficient and competitive banking sector, which would be able to handle the assault of globalization and liberalization (BNM, 2001). Effectively, after the completion of the merger program the number of domestic banking institutions was significantly reduced to 10 domestic banking groups consisting of 10 commercial banks, 10 finance companies and nine merchant banks (Table 1). BNM permitted the domestic banking institutions to form their own banking groups as to meet the minimum capital requirement of RM2 billion and minimum total assets of RM25 billion. The anchor bank status was granted to Malayan Banking, Bumiputra-Commerce Bank, RHB Bank, Public Bank, Arab Malaysian Bank, Hong Leong Bank, Perwira Affin Bank, Multi-Purpose Bank, Southern Bank and EON Bank (See Appendix 1 for merger programme details). The merger process, which involved consolidation of 51.75% (excluding Bank Utama Berhad's assets of 1.8%) of the total assets of the banking institutions (commercial banks, finance companies and merchant banks), was achieved at a minimum interference and disarticulation to the financial system (BNM, 2001).
Table 2: Size of Banking Groups (RM million) Banking Groups Total Malayan Banking1 Commerce Assets-Holding RHB Capital Public Bank
3 2

Loans % Share 21.1% 9.6% 8.1% 5.3% 1.8% 5.0% 21.1% 3.7% 3.6% 2.8% 1.0% 16.9% 100% Total 149,897.3 74,370.3 56,045.5 44,234.6 10,926.7 39,543.6 15,646.4 23,446.4 24,813.0 17,119.7 9,619.8 124,302.7 589,966.0 92,654.0 42,214.9 35,465.5 23,400.6 7,878.6 22,127.5 92,953.6 16,150.8 15,829.4 12,473.5 4,537.8 74,125.0 439,811.2

Assets % Share 25.4% 12.6% 9.5% 7.5% 1.9% 6.7% 2.7% 4.0% 4.2% 2.9% 1.6% 21.1% 100%

AMMB Holdings4 Hong Leong Bank5 Affin Holdings Southern Bank EON Bank Alliance Bank
6

Utama Banking Group7 Foreign Banks Total

Note: *The above represents the proforma statistics of the banking groups compiled by a simple amalgamation of the total loans and total assets of the anchor bank and its mergers partners based on the latest available balance sheets. **Unless stated otherwise figures are as at 31 December 2000 1. As at 30 June 2001. 2. As at 31 December 2001 3. As at 31 December 2001 4. As at 30 September 2001 5. As at 30 June 2001 6. As at 31 March 2001 7. As at 30 June 2001 Source: Individual Banks' Annual Report

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Malayan Banking Bhd and Bumiputra-Commerce Bank Bhd (BCB) emerged as the strongest banks with 24.7% and 12.3% of market share respectively in 2001 (Table 2). Despite the fact that 52 of the 54 financial institutions have already completed their mergers process, foreign banks in Malaysia still constituted a fairly large market share of about 21% of total assets. Those foreign banks, which still remained dominant in the local banking sector, include HSBC, Standard Chartered, OCBC, and Citibank (Table 3) (Ooi and Tan, 2002).
Table 3: Market Ranking of Foreign Banks in Malaysia (as at end of June 2001) Banks HSBC OCBC Standard Chartered Citibank UOB-OUB combined Source: Ooi and Tan (2002) Assets 1 3 2 4 5 Loans and Advances 2 1 3 4 5

The merger exercise is however still incomplete. The Utama Bank-RHB Bank merger is still pending, and the deadline for banks which have not found merger partners to either do so or meet the central banks capital requirement of RM2 billion had been extended. Negotiations had dragged on for almost a year but no agreement has yet been inked. Utama-Banking Group (UBG) had failed to lock in an agreement in three previous attempts, first with Affin Bank, and then with AMMB Holdings. The third strive was with EON Bank but talks were called off before they could commence (Taing, 2002). According to the Reuters report, UBG will somehow became an anchor in the process of merging with RHB Bank, and that UBG would be expected to take control of the merged entity via a controlling stake in RHB. UBG began talks to buy a 23.9% stake in RHB from Tan Sri Rashid Hussain in April 2001 but negotiations had came to a standstill over control and pricing issues (Reuters, 12 March 2002). Up till now, there are no indications that both banks are ready to announce a deal. This stalemate has delayed a merger programme that will otherwise complete a government-ordered consolidation of the countrys 54 financial institutions into 10 core banks. To facilitate the merging process the Central Bank presented a model for the valuation of merging banks. The maximum possible value was given to shareholders so as to keep the equity market stable. It was important that the valuation of shares of each financial institution was fair to all shareholders. Consequences of Mergers The creation of the ten domestic financial groups was to ensure that the domestic banking institutions would be able to withstand pressures and challenges arising from globalization and competitive global environment. This move towards merging was in line with the Governments policy not to bail out weak companies but to rationalize businesses so as to become more viable. Business consolidation through mergers is indeed a common practice globally to achieve economies of scale and higher productivity.

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In this time and age of globalization, banks must merge to survive the pressure of greater competition. Many Asian nations had already moved towards merging their banking system and Malaysia is no exception. The IMF too had forced countries under their programs (example Indonesia, Thailand and South Korea) to reduce the number of banking institutions by effectively closing them down. Malaysia did not believe that the IMF prescription of closing down the problematic banks was the route to follow, as the social costs involved in terms of dislocation of resources were high. A more reasonable approach adopted by Malaysia was the guided merger, with the central bank playing a proactive role in solving the issues involved and the principle of fairness was strictly applied to all parties in the merger. Without the merger, the smaller financial institutions may disappear as a result of globalization and increased competition. There is actually no place for family run banks to survive in the long run. Analysts had been keeping an eye on the bank merger programme for the effect of mergers on loans growth, cost savings achieved, post-merger staff retrenchment, enhancement of return on equity and time lag for completion of mergers. Although the mergers have been government-ordered, it was also driven by the need to recapitalize distressed institutions after the financial crisis, which began in July 1997. The banking institutions were busy preserving the quality of their balance sheets and coping with the erosion in their capital instead of generating new loans. The pullback effect in loan activities posed a potential disruption to the smooth functioning of the intermediation process and threatens to push the Malaysian economy into deeper recession. (The Star, 2001) To determine the impact of mergers on bank profitability, ratios such as return on assets (ROA) and/or return on equity (ROE) before and after merger relative to peer groups of banks that did no engage in mergers had been used in a number of studies. Some found improved profitability ratios associated with mergers (Rhoades, 1998) although others, such as Berger and Humphrey (1991) and Chamberlain (1998) found no improvement in these ratios. Notably, the Malaysian Banking system recorded a significant increase of 107.5% in pre-tax profit for the calendar year 2000 after the merger process took off with increased ROA to 1.5% from 0.7% in 1999. Consequently the return on equity increased significantly from 9.8% in 1999 to 20.4% in 2000 providing the testimony that the banking system had recovered and there was perceived improvement in productivity. The mergers seem to have eliminated excess capacity more efficiently than bankruptcy or other means of exit in part preserving the financial institutions product and services. However, there was a 2% reduction in net interest income in 2001 with a decreased of ROA to 1.1% and ROE decreased to 14.5% (BNM, 2001). Nonetheless, despite lower growth in real GDP, growth of total loans and advances was sustained at RM20.5 billion in 2001 (RM24.6 billion in 2000). This slowdown, which was primarily a consequence of the global economic downturn, had affected the domestic economy through lower exports earnings, unfavorable business sentiment and short-term speculative activity (BNM, 2001). With the banks strengthening again, loans growth is forecasted to increase to 7% in 2002 compared to

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5.5% in 2001 (Figure 1). On the other hand, some domestic banks had lost a substantial portion of profit to non-performing loans (NPLs). The higher loan loss provisions charged by the banking system in 2001 were the result of the increase in the NPL (6-month classification) to RM60 billion as at endDecember 2001. The increase in loan loss provisioning expenses was partly due to anchor banks having to realign the policies on loan loss provision of the acquired loan portfolios to be in line with their more stringent standards. These were, however, one-off adjustments, which in effect would place the banking system on a stronger footing as the adjustments were from minimum to more prudent standards. Hence, Malaysian banks registered the highest NPLs at 18.2% in 2001 but are forecasted to decrease to 12% in 2002 (Figure 1). This indicated that mergers had not weakened the strength of the acquiring banks and proved to be successful at combating balance sheet deteriorations. A survey done by Asiaweek (2001) indicated that of the 10 core domestic banks, six made it to the top ten banks in Malaysia in terms of assets and profits.
Figure 1: Loan Growth and Non-Performing Loans of Malaysian Banks (2000-2002)

20

18.2%
18 16 14

12%

Percentage (%) Percentage (%)

12% Loan Growth (%) Non-P erforming Loans (%) 7% 5.5%

12 10 8 6 4 2 0 2000 2001(F) 2002(F)

3%

Ye a r

Source:Asiaweek,14 September 2001 [http://www.asiaweek.com/asiaweek/features/financial500.2001/capsule_malaysia.html]

Merger in general is a complex proposition given the best of conditions and despite their appeal, only a small percentage, ultimately makes it. Often rather than not, the measures implemented may result in disruption rather than construct competence within the industry (Gunasegaran, 2002). Even as the mergers came through, other problems may emerge such as systems and staff integration, staff cuts and bank branches closure, rejuvenating confidence, and refocusing on business. The issue of human capital is crucial in

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the first stages of merger and it always begins with the employees who might start leaving because they get demoralized (Cane, 2001). In order to minimize the difficulties involved, particularly to those directly employed in the industry, an attractive retrenchment scheme was devised in Malaysia where the costs were borne by the merged entities. Those retrenched were granted the opportunity for diverse options of relocation to other suitable business sectors, or to opt for the voluntary separation schemes (VSS).
Table 4: Top 10 Banks in Malaysia (2001) Ranks Institution Assets ($ Million) 33,506 16,626 13,319 11,641 7,708 6,393 6,170 5,294 5,157 4,872 Profits ($ Millions) Assets 1 2 3 4 5 6 7 8 9 10 Malayan Banking Bumiputra-Commerce Bank RHB Bank Public Bank Hong Leong Bank HSBC Bank Southern Bank OCBC Bank Standard Chartered Bank Citibank 358.0 119.2 103.0 188.6 88.9 115.6 36.4 68.4 82.9 81.0 1.1% 0.7% 0.8% 1.6% 1.2% 1.8% 0.6% 1.3% 1.6% 1.7% Profits as % of Equity 13.1% 11.3% 8.7% 16.2% 16.6% 30.4% 6.7% 14.9% 25.5% 24.5%

Source: Asiaweek, 14 September2001 [http://www.asiaweek.com/asiaweek/features/financial500.2001/capsule_malaysia.html]

Each banking group, which implemented a VSS, was vetted by the Central Bank. Besides that, a comprehensive retraining and re-skilling programme had been developed with the cooperation of the Malaysian Institute of Bankers to facilitate a smooth transition of the affected staffs into new areas in the financial industry and to other industries in the economy. According to BNM (2001), the resulting effect of the merging exercises during the year was where 187 branches were closed, whilst 55 branches were relocated and a total of 4,240 staff left the banking industry. To encourage rapid merging the Government provided further fiscal incentives in terms of exemption of stamp duty and real property gains tax for merging banks. The Government also assisted by giving certain other tax incentives to smoothen the merger process. One such incentive was to give tax credits for losses incurred by financial institutions involved in the merger. In this way, the anchor banks could absorb larger costs associated with the merger exercise. As much as 50% of the accumulated losses of acquired institutions were written off tax payable. While the Government was seen to be sacrificing income from taxes, the potential costs of bailing out banking institutions in the future would have been even higher without the merger. Indirectly, the tax breaks made acquisition price more attractive for the acquired banks. For the acquiring banks, the total cost was lower as they utilized the losses, incurred by the acquired bank as tax credit. For example, during negotiations be-

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tween AMMB Holdings and Danamodal to buy MBF Finance, RM2.5 billion accumulated tax losses from MBF Finance was used to offset tax on future earnings (The Edge, 28 May 2001).

The merger process presented a challenge in managing customer expectations in Malaysia where the personal touch issue has become ever more important. Retail customers who had comfortably adjusted to the business practice in a particular branch now have their accounts shifted to another where the personal touch was lost. Besides that, customers have been dissatisfied about the quality of the services as compared to their previous banks. Often the product mix had changed or standardized according to the merger plan. This posed as a noteworthy disadvantage to customers who were accustomed to customized services and want them to continue (Tan, 2002). The risk at the corporate level has been even more complicated, as large corporate account holders, familiarized with particular account managers were forced to rebuild their personal banking relationship with a new face. In many cases, clients opted to seek out another potential bank with whom they have had prior dealings rather than having to rebuild this relationship, especially when service levels remained weak during the transition period of the merger (Kumar, 2002). The resulting effect was a reduction in their asset portfolios and thus on balance sheet and income performance. Another adverse consequence of the merging process was the fact that credit availability particularly to small-and medium-sized industries (SMIs) was adversely affected because smaller banks were a primary source of SMIs credit and these smaller banks became non-existent (Tan, 2002). SMIs particularly those in the early starting stage often face difficulty in obtaining bank credit as they lack collateral and the track record usually required by banks. Mergers also caused some dissatisfaction among shareholders, for instance, when Malayan Banking Berhad acquired the commercial and stock broking businesses of PhileoAllied Bank Berhad (one of the small banks being taken over by bigger banks). Avenue Assets Bhd, which had an 18.2% stake in PhileoAllied, protested against the valuation of PhileoAllieds assets (Philip, 2000). One issue was where the net tangible assets (NTA) of PhileoAllied were about 1.5-2 times of profit unlike Maybanks 1.2 times under the merger scheme. Phileo Allieds NTA per share was RM1.86 as at April 30, 2000 and this would have risen to RM2.13 assuming all the loan stocks were converted (Philip, 2000). Another issue was PhileoAllied shareholders were not given a share and cash option unlike other merger schemes, for instance the merger between BHL Bank Bhd and Southern Bank Bhd (Philip, 2000). The main thing that made the scheme unappealing to PhileoAllied was because the lack of a cash alternative by Maybank could not generate the cash required to repay their bankers at the disposal of PhileoAllied.

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Besides having to work out a fair valuation among merger partners, another issue plaguing shareholders was the cost of integration of the information technology (IT) systems among merger partners. Integrating the IT systems and installing them took at least a year and the cost was more than RM1 billion. These costs included a new IT system, consultancy services and also hardware costs. There were two options adopted by the Malaysian banks. First, anchor banks were to implement a new retail banking system and migrated all banks within the group to the new system. For example, Public Bank and RHB Bank took this approach and the estimated spending was RM350 million. The second choice was to migrate to the existing anchor banks system. This is only feasible when the anchor bank is relatively large, such as Maybank. No matter what choice the banks made there were crucial factors to be considered before full implementation can be conducted and these were not always a smooth flow. There was a need to look at various broad issues from core banking systems that ties everything together to retail systems such as branch networks, trading systems, back office accounting to automated teller machines (ATMs). This was important because again it all boiled down to customers where they needed to feel that they were dealing with one bank and not separate banks (Chin, 2001). While banks were busy considering such issues, it was not surprising that some customers had already shifted their business elsewhere. There have also been accusations that the merger programme was politically driven and served to dilute the Chinese interest in the banking system, which rubbed many ethnic Chinese the wrong way. In 1999 when BNM first proposed forming six anchor banks, eight of the 21 commercial banks controlled by the Chinese were reduced to two after the merger (Netto, 1999). Ironically, these Chinese-owned banks were well managed and generally healthier than the political banks with fewer bad loans. In accordance to the original plan, six anchor banks would be generated namely, Maybank (government link); Multi-Purpose Bank (controlled by associates of Finance Minister Daim Zainuddin); Bumiputra Commerce Bank (whose new shareholders would include the government as well as businessman linked to Finance Minister Daim Zainuddin); Perwira Affin Bank (controlled by Armed Forces Cooperative and some politically well-connected businessman); Public Bank (controlled by entrepreneur Teh Hong Piow); and Southern Bank (controlled by the family casino owner Lim Goh Tong) (Shameen, 1999). Almost three months after it was first announced, the grand merger plan was abandoned and the central bank proposed increasing the number of anchor banks to 10. It has been said that the sudden change of mind was because Prime Minister Dr. Mahathir was facing an intense election and needed Chinese votes to return to power. BNM however denied the allegations (Singapore Strait Times, 23 August 1999). Implications for the Future It may be too soon to comprehend or evaluate the full impact of the bank merger program in Malaysia. However, a number of observations had become quite clear. With effect from 14 April 2000, banking institutions were given blanket approval by Bank Negara Malaysia to outsource non-core functions to third party resident service providers (Table 5). This means that financial institutions are becoming more specialized in specific product markets.

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Table 5: Outsourcing of ICT Related Functions Outsourced Functions Posting of statements Office Automation maintenance Data Centre operations* System maintenance Network operations Data Centre infrastructure Disaster Recovery for RENTAS Branch hardware ATM Cash management E-HRMS Microfiche Web-site E-mail operations No. of Banking Institutions 6 4 4 3 3 1 1 1 1 1 1 1 2

12

* Data center operations are foreign banks regional centers or domestic banks subsidiary company. Source: BNM Seminar 10 October 2001

Consequently, instead of a growth in the number of universal banks, firm specialization is occurring. Specialization is supposed to cut costs and raise productivity as well as efficiencies. Also the larger and a stronger capital base of domestic banking groups have strengthened the resilience of these institutions. In general banks also face a clash in business culture as reflected by the lack of cross selling of products when there was a merger of retail-oriented and corporate banking-oriented banks. The merger process may affect the syndicated loan activities of banks. In the past, borrowers from the infrastructure related sectors dominated the Ringgit syndicated loan market. Major borrowers within this sector were independent power producers and toll road concessionaires which required long-term financing for their projects. These project financing related loans were inclined to be fairly large in terms of size. Coupled with the strong credit appetite from banks before the Asian crisis, the syndicated loan market grew to its peak in 1997, with an outstanding amount of RM22.88 billion (US$6 billion). As of March 2001, outstanding ringgit syndicated loans stood at RM18.3 billion against the total loans in the banking system of RM471.3 billion (Chew, 2001). A merged bank can lead to a stronger competitor but it also means the number of banks willing to hold part of a loan reduces accordingly. With the lessons from the Asian crisis, banks have become more prudent in their lending. Banks have been more cautious and selective in their choice of credits although there was surplus liquidity in the banking system. These factors, together with pressure to meet the minimum 8% per annum loan growth quota set by BNM, meant that most ringgit term borrowings were restricted to good credit names (Chew, 2001). In addition, although capital and single customer limits

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of banks have increased, participation from banks in the loan market has been dependant on relationships. Banking analysts believe it will only be a matter of time before banks are forced to merge again. This time mergers and acquisitions will be driven by market forces rather than by the central bank exerting the force (Kumar, 2002). There are still too many banking groups and thus Malaysia is still far behind the pace set by Singapore (Taing, 2001). Given the increasing capital requirements and the eventual liberalization of the sector, it is only logical that banks will merge possibly with locally incorporated foreign banks. Conclusion Merger has been described by the Central Bank to be a necessary pre-condition to create strong, efficient and competitive banking systems. However, the merging programme supplemented with other measures, as merging on its own cannot achieve these objectives. BNM, therefore, continues to introduce appropriate policies such as enhancing the expertise and professionalism of the banking personnel and bringing about more effective corporate governance to further increase the resilience and competitiveness of the banking institutions in the context of the challenges of a globalized and liberalized environment. The merger program is the first important step in this mission. Due to savings on manpower, information system and reduction in branch networks, banking services are said to be made available to the nation at a lower cost. The merged banking groups have now focused their attention towards ensuring a smooth transition in the integration process of their businesses. Efforts would continue to be channeled towards strengthening the core groups of banking institutions to become more significant players in the domestic market.

Appendix 1: Merger Program Details Vendor Phileo Allied The Pacific Bank Sime Bank 29 Oct 99 100.0 79.6 24 Aug 00 100.0 1,250.0 30 Aug 00 100.0 1,300.0 Phileo was acquired at 1.3x book value and Pacific at 1.8x book value Even without the two banks, Maybank's lead position would have still be intact Pacific gives exposure to the Chinese SMI segment and Phileo provides equity sales expertise Merger created the 2nd largest domestic bank with the infrastructure to compete with Maybank Bank Negara directive to merge. Delta was acquired at 1.9x book value 1.4x book value. Both are small and have little impact in terms of integ risks Hock Hua Bank was acquired at 1.4x book value. Friendly merger 67.2 0.0 Advance was acquired at 1.7x book value Sime Merchant was acquired for RM5 and provides the group with a merchant bank license 210.0 100.0 100.0 470.0 338.6 Impact from Wah Tat acquisition is small as it accounts for c. 3% of HL Bank assets CCM complements Hong Leong Finance's niche in car financing Acquired at 1.6x book value. Post acquisition, BSN Commercial's asset quality has deteriorated 30 Aug 00 100.0 32.9 Acquisition price based on adjusted NTA computed on Dec 99 NTA of RM5.3m Date Stake (%) Value (RM Mils.) SSB comments on transaction details and rationale

Acquirer

Acquired

Maybank

Phileo Allied Bank & Phileo Allied Securities

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The Pacific Bank

Sime Finance

Commerce-Asset Holding Various Various Various Various Various 29 Aug 00 100.0 30 Jun 00 100.0 22 Dec 00 100.0 1,249.0 30 Jun 00 90.0 69.3 30 Jun 00 100.0 273.8

Bumiputera-Commerce

MOF; Khazanah

22 Jun 99

100.0

1,464.3

RHB Capital

Delta Finance

Interfinance

Public Bank

Hock Hua Bank

Advance Finance

Sime Merchant Bankers

Hong Leong Bank Wah Tat Bank Gadek Capital BSN 30 Jun 00 30 Aug 00

Various

30 Jun 00

100.0

Credit Corporation Malaysia

Affin Holdings

BSN Commercial Bank

BSN Merchant Bank

BSN

14

Appendix 1: Merger Program Details Vendor BSN Various 17 Nov 00 100.0 283.5 30 Aug 00 100.0 85.7 IBM was acquired at 2.1x adjusted book value of RM132.3m as at 31 December 1999 Sabah Bank was acquired at 1.4x adjusted book of RM182.6m as at 31 1999 Acquisition price based on adjusted NTA as at 30 June 1999 of RM77.8m 1.7x book value Sabah Finance had an audited net deficit of RM33.9m as at 31 December 1999 Acquisition price based on adjusted NTA as at 31 December 1999 of Rothschild RM109.8m, or 1.3x book Acquisition price based on adjusted NTA as at 31 December 1999 of Merchant Hold. RM146m, or 1.6x book value 1,079.3 5.0 100.0 100.0 50.1 30 Jun 00 100.0 319.4 23.0 8.0 0.0 Acquired at 1.2x book value Acquired at 1.2x book value Pegawai Acquired at 1.5x book value Purchased for RM1, had net tangible liabilties of RM357m as at 31 March 2000 Ban Hin Lee was acquired at 1.9x book value Date Stake (%) Value (RM Mils.) SSB comments on transaction details and rationale

Acquirer

Acquired

BSN Finance

Alliance Bank

International Bank Malaysia Various Various 30 Aug 00 100.0 130.0 30 Aug 00 100.0 255.6

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Sabah Bank

Bolton Finance

Sabah Finance Khazanah; NM 14 Aug 00 100.0 43.9

Various

17 Nov 00

100.0

1.6

Bumiputera Merchant Bank Amanah 14 Aug 00 100.0 230.0

Amanah Merchant Bank

Southern Bank Various Various P. Merchant; K. 27 Jun 00 28 Jun 00 6 Jan 00 30 Aug 00

Ban Hin Lee Bank

Various

27 Apr 00

100.0 100.0

Cempaka Finance

United Merchant Finance

Perdana Finance

Perdana Merchant Bankers United Merchant Group Various

EON Bank

Oriental Bank

15

Appendix 1: Merger Program Details Vendor Various Various Various Danamodal 3 Aug 01 100.0 925.0 30 Aug 00 100.0 19.0 Acquired at 1.4x book value Payment comprises RM475m cash and a continget amount of RM450 from recoveries. MBF Finance has S/H funds of RM14.5m as at 30 June 2001. At RM450m plus tax credit suggest acquisition cost of c.1.0x book value but @ RM925m, AMF could be paying 2.2x book value 30 June 00 100.0 80.0 Acquired at 2.6x book value 30 Jun 00 100.0 373.0 Acquired at 2.3x book value Date Stake (%) Value (RM Mils.) SSB comments on transaction details and rationale

Acquirer

Acquired

MIMB

City Finance

Managerial Finance

Perkasa Finance

Arab-Malaysia Finance

MBF Finance

Total

10,766.7

Source: Salmon Smith Barney Inc.p 7and 8.

16

Volume 30 Number 4 2003

References

17

, Bank Merger Plan Angers Chinese, Singapore Straits Time, August 23, 1999; http://straitstimes.asia1.com/reg/mal1_0823.html [http://www.ocbc. Com.sg/info/inv_rela/downloads/2001/Integration.pdf] Bank Negara Malaysia, (1999), The Central Bank and the Financial System in Malaysia, A Decade of Change 1989-1999, p.598-600. Bank Negara Malaysia, Annual Report 2001. Berger, A.N. and Humphrey D.B., (1991), Megamergers in Banking and the Use of Cost Efficiency as an Antitrust Defense, Anti Trust Bulletin 37, p.541-600. Berger, A.N. and Wharton Financial Institutions Center Philadelphia, (2000), The Integration of the Financial Services Industry: Where are the Efficiencies?, North American Actuarial Journal 4. Cane, E.,(2001), The IT Side of Bank Mergers, FinanceAsia.com, August 14. Chamberlain, S.L., (1998), The Effect of Ownership Changes on Subsidiary Level Earnings, Kluwer Academic, Boston MA, p137-172. Chew, H.M., (2001), Malaysian Loan Market To Enter New Growth Phase, FinanceAsia.com Ltd, October 16. Chin, J., (2001), Banks To Spend More Than RM1 Billion to Merge Overall IT Systems, The Edge Daily, January 30. Devados, A.R.M., (2002), Retrenched? Get Certified!, The Edge Daily, January 15. Drake, P.J., (1969), Financial Development in Malaya & Singapore, Australian National University Press, Canberra. Gunasegaram, P., (2002), Question Time: Do we Really Need More Bank Mergers, The Edge Daily, January 21. Kumar, S., (2002), Bank Mergers: Why They Dont Always Work, The Edge Daily, March 11. Netto, A., (1999), Rushed Bank Mergers Cats Shadow on Malaysian Recovery, Asia Times, September 8. Ooi, S.T. and Tan, N.J., (2002), Integration of KCH, OCBC Bank, February 27. Philip, C.J., (2000), Malaysias Bank Mergers Hit Potholes, Asia-Pacific Editorial Consultants, July 26. Reuters, (2002), Mahathir Says Doesnt Know If Bank Merger Signed, Yahoo! News, March 12. [http://asia.news.yahoo.com/020312/reuters/nklr308467.html] Rhoades, S.A., (1998), The Efficiency Effects of Bank Mergers: An Overview of Case Studies of Nine Mergers, Journal of Banking and Finance 22, p.273-291.

Managerial Finance
Shameen, A., (1999), Rethinking the Merger Plan, Asiaweek, October 8.

18

Shari, Michael, (2001), Commentary Malaysias Not So Masterful Plan, Business Week, March 12. Star Business, (2001), New Faces of Banking-A Special Focus on Banking & Finance, The Star, April 30. Taing A, Barrock L. and Fernandez E., (2001), Cover Story No quick Fixes, The Edge Daily, March 5. Taing, A., (2001), A Testing Time In 2001, The Edge Daily, December 21. Taing, A., (2001), As Deadliners, Utama-RHB Bank Merger Still Far Away, The Edge Daily, December 14. Taing, A., (2002), Cover Story: Final Encounter Merger Saga May End This Friday, The Edge Daily, January 30. [http://www.theedgedaily.com/article.cfm?id=10313] Tan, H.K.L., (2002), IT Drives The Bank-Merger Wave, Malaysian Institute of Economic Research, March. The Financial 500, (2001), The Regions Largest Banks 2001: Malaysia, Asiaweek.com. September, 14, [http://www.asiaweek.com/asiaweek/features/financial500.2001/capsule _malaysia.html]