Hostile Bidders

Malaysia's bankers have been watching with baited breath in recent weeks, to see if a hostile takeover of one of the country's lenders heralds a long-awaited consolidation.



Bumiputera Commerce Holdings Berhad (BCHB) is behind the recent takeover attempt of Southern Bank, a small but important local institution.



BCHB has something of a reputation for takeovers too, as it has been linked to two failed takeover attempts in the last two years and is known to be still on the prowl around the sector. The previous failed take-overs had targeted two leading car loan lenders, namely AMMB Holdings and EON Bank.



Many analysts feel that BCHB and Southern's businesses would compliment each other well. Commerce International Merchant Bankers Berhad (CIMB), the arm of BCHB which would absorb Southern bank, is strong in the corporate advisory and treasury business, but lacks a retail operation and commercial base.



At the same time, while Southern Bank is only the ninth largest lender in the country, small and medium businesses are well represented in its portfolio, along with consumer financing and credit cards. This couples with a justified reputation for being well run, making the company a perfect fit for CIMB.



The news of the move brought some excitement to the stock market last week, as holdings companies with Southern Bank stock saw their portfolios grow in anticipation of the merger. Even Temasek, Singapore's state-owned investment company, was keen for a slice of the action, as it bought a 7.4% stake in Southern Bank on October 28.



With the takeover being hostile, CIMB will have to persuade shareholders of the merits of the move. Southern Bank's CEO, Tan Teong Hean, has also refused to take the change lying down and as a major shareholder in the bank, he wants to keep it independent, having fended off previous takeover attempts.



However, some point out that the move also fits nicely with government plans for the development of the financial sector, meaning that the move could be approved at the highest levels, although the central bank's stated aim is to let the market make the choice.



The government's plan for the sector is all in a document called the Financial Sector Master Plan. Phase one introduced a round of mergers which shrank the financial services sector from 71 institutions to 40.



These divide up into 10 local banks and 30 other financial-services providers, including 13 subsidiaries of foreign banks. Standard Chartered, HSBC and Citibank head the list, which also includes Deutsche Bank and ABN Amro. These foreign lenders account for about 30% of the total assets of the banking industry.



Industry watchers say the current group of 10 domestic banks and 13 foreign ones is still too large for the market and could result in a struggle for the smaller players when the market further liberalises. More consolidation would be nice, but is only expected if the central bank pushes for it.



The bank had said after the string of mergers in 1999 and 2000 that future mergers would be dictated by market forces and not by regulators. But Bank Negara's recent moves have analysts thinking that the central bank governor and her staff are once again ready to coax banks into partnerships.



Maybank, Public Bank, RHB Bank Bhd. and Bumiputera-Commerce Bank Bhd. (a commercial bank also owned by BCHB) are considered the strongest among the local banks and the ones most likely to survive through another round of mergers and foreign competition. Among the rest of the lenders, Hong Leong Bank Bhd., Public Bank and Southern Bank Bhd. stand out because they are owned and operated by Chinese.



Southern's reticence to agree to a merger is not as simple as a desire to retain control for pride's sake. The bank's status as a Chinese bank owned by a core group of Chinese shareholders is also a factor.



The bank's culture and services reflect Chinese culture and practices. Malaysia's Chinese population make up 25% of the country, and those people often patronise Chinese banks such as Southern, Public Bank, or Hong Leong. If Southern were bought, the position of the other two survivors would be strengthened, as Southern's Chinese customers may likely migrate; the result would be that neither Public Bank nor Hong Leong would be likely candidates for mergers and acquisitions further down the line.



Meanwhile, it is not just Southern Bank and CIMB which are making headlines about mergers. Various other institutions, both domestic and international, have been linked in such stories. Recently, rumours led to Maybank denying any "immediate plans" to merge with Bank Islam Malaysia Bhd., the country's largest Islamic bank.



Most observers think mergers are a good idea, but there is some opposition to the idea that a smaller field of larger domestic players would be a significant improvement. Some think it might be more useful for foreign banks to merge with Malaysian ones, or invest in them.



They say Malaysian banks need to improve technology and services and should do this by merging with banks that have the know-how. A multinational lender taking a stake as large as the maximum-permitted 30% could yield significant improvements.



"A foreign partner can bring in some expertise," says Eugene Lai, Managing Director of JP Morgan Malaysia. "We're likely to see at least one deal within the next year. There seems to be willingness on both sides."



Indeed, Canada's Bank of Nova Scotia, which already has operations in Malaysia, has been popping up in news reports as an interested candidate, despite its smaller presence in the country compared to other foreign banks. Scotia reportedly has $4.2bn to spend on acquisitions outside Canada, and has said it is considering acquisitions in China, India, Malaysia and Thailand.



Whilst the stage is apparently set for mergers and the Central Bank is keen for further consolidation, many hope that the market will be the decision taker. In this case mergers will only take place if they make sense to shareholders - which should mean they make sense for the sector and its development.