TWO major banking deals of late have caught the interest of analysts and investors which could possibly see more banking groups make inroads or consolidate their position in Asia.
Much would, however, according to analysts, depend on how much it would add value to their operations and how quick banks can fix the challenges in the markets they are entering into.
CIMB Group Holdings Bhd recently announced that it was acquiring most of Royal Bank of Scotland's (RBS) cash equities and associated investment banking business in Asia-Pacific for RM849.4mil. RBS would in turn pay CIMB about RM67.4mil, which would be used to defray the cost of running its former business for the first year.
Nazir’s CIMB Group bought RBS’ cash equities and associated investment banking business in Asia Pacific for RM849.4mil.
The deal would see CIMB emerging as the largest investment banking franchise based in Asia-Pacific excluding Japan. It involves CIMB paying RM431.8mil to RBS for the operations and injecting another RM417.6mil of new capital into various operating entities.
Meanwhile, South-East Asia's largest lender by assets, DBS Bank Ltd, a few days ago said it would buy Temasek's 67.4% stake in Bank Danamon in Indonesia for US$7.24bil (RM22.38bil), making it the fifth biggest bank in Indonesia. Temasek is also a major shareholder of DBS.
At the same time, DBS had obtained the nod from Bank Negara to commence discussion to purchase Singapore state investor Temasek Holding's 14.2% interest in Alliance Financial Group (AFG).
The move by CIMB to buy the RBS businesses is a positive move and over the long term will provide a platform for Malaysia's second largest lender to expand its operations outside Asean in its bid to be a universal banking group.
In a recent briefing, its group chief executive officer Datuk Seri Nazir Razaksaid the acquisition of some of RBS' businesses was an opportunity to complete the build-up of the group's capabilities in Asia Pacific markets in a quicker and less expensive way than growing organically.
The acquisition, pending regulatory approvals, would give the group new onshore presence in Taiwan and Australia as well as a bigger presence in Hong Kong, India and China.
The integrated CIMB-RBS platform would strengthen its value proposition to its existing customers in Asean, while also reaching substantial economies of scale in the stockbroking business, which involves high capital investments with low margins, he notes.
Cheah: ‘The acquisition of RBS assets will help CIMB transfrom from being an Asean-focused bank.’
CIMB, which had assumed economic ownership on RBS on some of its businesses since March 1, expects to break even this year.
Most of the RBS units would be absorbed into CIMB's subsidiary, CIMB Securities International.
Alliance Research analyst Cheah King Yoong, who is calling a “buy” on CIMB group, says the acquisition of the RBS businesses will help CIMB “leapfrog” its ability in the wider Asian region from being an Asean-focused bank.
But he reckons it will take another three to five years for the group to gain traction from that purchase before it will be able to challenge the banks that are higher up the market size rankings in the Asean region.
“We believe that CIMB's acquisition focus is more leaning towards bringing value accretion to its shareholders.
“This means engaging in acquisitions of bargained assets, and at the same time, adding value to its shareholders. For example, CIMB bought Bank Niaga at about 1.5 times price to book compared with other regional players who paid higher for their acquisitions in Indonesia. For the acquisition of the current RBS businesses, it is about 1.1 times price to book,” he notes.
DBS' acquisition of Bank Danamon was 2.6 times price to book compared with an average 2.2 times price to book for an acquisition of a bank in Indonesia
Cheah says the next three years would be a crucial period for CIMB, adding that if it could retain key management and clients of RBS then it would ensure the group is successful in building its franchise in Asia.
CIMB expects 350 to 400 of RBS's existing staff to join the bank, with 82 out of the 94 key senior personnel accepting to join CIMB at the moment. Leading the move is the current RBS global banking Asia-Pacific head Matthew Kirby, who will assume the role of CIMB North Asia country head once the deal is completed.
The group was also in talks with brewer San Miguel Corp for a stake in the Philippines' Bank of Commerce and hopes to conclude discussions in the first quarter this year.
Gupta: ‘DBS would use its balance sheet to cut Danamon’s funding cost and unleash its potential.’
At the same time, it was also applying for a licence in Laos. Some analysts are of the view that after securing operations in the Phillipines and Laos, the group would start consolidating its operations rather then expanding its footprint in the region.
The move by DBS to acquire Bank Danamon is seen as a way to further consolidate its position in the fast growing financial services market in Indonesia where bank penetration is low and annual loans growth is about 20%.
Danamon's lower returns on equity than some of its peers and a heavy exposure to motor financing could pose a problem to DBS. However, DBS chief executive Piyush Gupta, quoted by Reuters in a recent investors and media briefing, said the bank has the capacity to “unshackle these businesses, adding that it would use its balance sheet to cut Danamon's funding costs and unleash its potential and also break DBS' perception as a low-margin, mature-market bank.”
The deal, he says, will change DBS from being 11% in high-growth markets to 33% exposure to high-growth markets.
That acquisition also challenges the thinking that Singapore's banks, although much larger in market capitalisation than Malaysian banks, will soon more than just hear the footsteps of Malaysian banks approaching their standing.
The large Singaporean banks mainly don't have the exposure of brisk growth in the fast moving South-East Asian markets compared with the large banks in Malaysia, namely CIMB and Malayan Banking Bhd, which have reaped the growth the Asean markets are demonstrating.
And in turn, attention from investors who will want to own banks that have a large exposure to the fast growing markets of South-East Asia, might also be swayed in their direction should the current developments continue uninterrupted.
In terms of which banking group is more compelling in carving a stronger foothold in the region, analysts feel it is difficult to make a comparison.
A senior banking analyst from a foreign investment bank says: “It is difficult to compare as CIMB is focusing on investment banking while DBS on commercial banking. Commercial banking is more sustainable while investment banking is market-driven.”
A research head of a local brokerage says he feels CIMB is more compelling as it has been careful in its acquisitions and has not been overpaying, unlike DBS. For example, DBS' purchase of Hong Kong's Dao Heng Bank more than a decade ago, which led to two big writedowns in later years, was a huge disappointment for some in the market who had felt Singapore's largest bank had overpaid.
RAM Ratings' head of financial institution ratings Wong Yin Ching feels the large banks have focused closer to home in order to complete their value proposition for not only their customers but also investors.
She says Indonesia is the key piece in the jigsaw puzzle for any Malaysian or Singapore bank's regional expansion story given the low banking penetration rate and its considerable population, broad interest margins, healthy economic growth prospects and vast potential for Islamic banking services.
While expansion into regional markets adds to income diversity, Wong says it may pose challenges in terms of risk management, such as operating and regulatory risks.
The move by DBS to make a significant presence in Indonesia via the acquisition of Danamon Bank, however, demonstrates the kind of risks banks need to be aware of.
There has been recent opposition from political parties which intend to bar heavy foreign ownership of local banks.
At the moment, there is no indication that the deal would fall through as there is no law to prohibit the acquisition.
Indonesia allows foreign ownership of up to 99% of local banks as opposed to 30% in Malaysia.
The central bank of Indonesia last year proposed a rule that foreign ownership of local banks be capped around 50% but had not legislated it due to opposition from investors.
On the pace of expansion into the region, industry observers feel that Malaysian banks are expanding faster then their Singapore counterparts partly from the fact that the contribution of earnings to their regional operations are higher while many Singapore banks would rather remain in their historical markets like Malaysia where cultural differences are not that glaring.
