Malaysia: Merger Beginnings

2003

Malcolm Cook

Malaysia’s first round of crisis-inspired and state-guided local bank mergers, that reduced the number of local banks from twenty to ten, finished in late 2002. Yet, on 10 May, state-controlled EON Bank and Ambank received permission from Bank Negara Malaysia (the central bank) to enter into merger talks. If successful, this would create the third largest banking group controlling 18 per cent of the consumer loan market, behind only the state-owned Malayan Bank and the state-controlled Bank Bumiputra-Commerce. At the moment, it looks like EON Capital, the holding company of EON Bank, will be the leader of the merged entity, further centralizing control of the banking system in the hands of state entities – a pattern also of the first round of mergers.

Local banking analysts expect that a successful merger between these two bumiputera banks will trigger a second round of local bank mergers with only five or six likely to survive. Malayan Bank, Bank Bumiputra-Commerce, and the ethnic Chinese Public Bank will survive, as they are too large to be bought out. However, Malayan Bank and Bank Bumiputra-Commerce are unlikely to be acquirers given their existing large market share and their growing interest in expanding overseas. Due to Malaysia’s long history of affirmative action in favour of the politically-dominant bumiputera community, it is possible that Bank Negara will only allow one ethnic Chinese bank to remain, undercutting Hong Leong Bank’s future despite being the fourth largest bank in Malaysia at present. Other local banks at risk of being acquired in the second round include the smaller, multi-ethnic Southern Bank and Alliance Bank, and the relatively weak state-controlled Affin Bank.

A second round of mergers, once complete, may advance the Ministry of Finance’s 2001 Financial Sector Masterplan, which is its response to the Asian Financial Crisis and the growing pressure on Malaysia to allow new foreign bank entry. This indicative plan sets out three stages of calibrated and limited liberalization with the first stage focussing on local bank consolidation to create large, professional local banks able to compete in a more open environment. Once the Ministry is satisfied that local banks are able to compete, stage two calls for foreign incumbent banks in Malaysia that control about 25 per cent of banking assets to be given more freedom of operations, including the right to set up a parallel, automated teller machine network. Stage three calls for a limited number of new foreign bank licenses to be issued. The last one was issued in 1972. A successful merger between EON Bank and AmBank may set the stage for a move to stage two in the next two to three years.

WATCHPOINT: If this first merger does trigger a second round of mergers, then Bank Negara may relax some operational restrictions on foreign banks as part of its WTO Doha Round commitments on financial services liberalization.

 

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