Can smaller banks in Malaysia survive?

AS the bigger anchor banks are confronted with further merger and acquisition (M&A) possibilities, what is the fate of the smaller banks?

With Hong Leong Bank taking over EON Bank, and either Maybank orCIMB possibly acquiring RHB Capital, that leaves AmBank, Affin Bankand Alliance Bank among the ranks of smaller banks in terms of asset size.

Many industry observers think they will eventually be swallowed up as they will not be able to withstand the competition and probably suffer from lack of economies of scale.

Necessary to merge?

“The smaller local banks will inevitably find themselves outgunned in basic banking activities such as deposit taking and lending, as the bigger banks by virtue of their economies of scale would be able to offer competitive pricing.

“The smaller local banks would have to strive harder against their bigger rivals by identifying and catering to more targeted market segments. They may also have to offer a superior and a more personalized banking experience to their customers,'' says Anandakumar Jegarasasingam, head of financial institution ratings, Malaysian Rating Corp Bhd.

To Anandakumar, a merger among the smaller banks may be desirable from the point of improving their economies of scale and enabling them to compete against the bigger banks from a better footing.

“However, at the same time, considering the varying commercial motives of the three main shareholders of these banks, a merger among any two of the smaller banks may also be harder to pull off,'' he says.

However, another banking analyst does not think that smaller banks will die a natural death, pointing out that there were many profitable foreign banks of around the same asset size. “As long as they have profitability, innovation and a niche market, they will be able to survive.''

Vincent Khoo, head of research at UOB Kay Hian, doubts if the landscape would become more competitive.

“It is already competitive now in a regulated market where severe price undercutting is not allowed,'' Khoo says. “In fact, this is the time when the scarcity premium for the smaller banks will go up.''

Strong shareholders

“All the three banks have strong strategic shareholders behind them Australia New Zealand Banking group (ANZ) for AMMB, Bank of East Asia (BEA) for Affin and Temasek for Alliance,'' says Lim Sue Lin, senior banking analyst at HwangDBS Vickers Research.

“ANZ has spent a lot of time and effort creating value for AMMB and I believe they would continue to do so. Perhaps ANZ could apply to raise their stake in AMMB. That remains to be seen as Bank Negara had stated that the 30% foreign strategic stake threshold policy remains and anything higher would only be considered on a case-by-case basis on rare occasions.

“The BEA-Affin union is less active but there is still talk that BEA could open doors for Affin to explore Islamic banking in China although certain regulatory approvals need to be sorted out.

“Temasek technically owns 14.2% of Alliance. The new management team is talking shape.

“We think that if Alliance is able to step up its performance, it would be an attractive M&A target.

“But for now, we believe it will remain a stand-alone, nimble bank gradually stepping up scale in certain segments,'' Lim tells StarBizWeek.

Two of Alliance Financial Group's shareholders Langkah Bahagia and Temasek own 29% under a company called Vertical Theme.

“We have strong shareholders,'' Alliance Bank CEO Sng Seow Wahsays.

Affin Holdings has three major shareholders Lembaga Tabung Angkatan Tentera, BEA and Boustead Holdings who collectively own about 79%. That leaves the free float at only about 21%.

We can stand on our own'

A recent internal study conducted revealed that Alliance can continue operating by itself.

“We have a good balance sheet, business focus and offer consistent service,'' Sng tells StarBizWeek.. “We are not perturbed by all this M&A talk.''

During the weekends, his personal customer surveys indicate that customers are confident of placing their deposits in Alliance, as evidenced by its strong deposit base.

“We have been able to hire senior executives, many returning Malaysians, which is an indication of their confidence in the bank,'' Sng says.

Mortgage loan approvals are back to pre-2007 levels.

Affin Bank managing director/CEO Datuk Zulkiflee Abbas Abdul Hamidhas similar sentiment. “We can continue doing our business. We know our niche, for instance, in small and medium scale enterprises (SMEs), hire purchase and mortgages,'' he tells StarBizWeek.

Affin's results have improved over the last five years with significant decrease in non-performing loans (NPLs).

The results for the period ended March 31 shows gross impaired loans at 3.4% compared with 3.6% a year earlier.

Loans growth hit 17% last year with deposit growth reaching 20%.

“The bank is making nice profits of over RM300mil, on a net basis, per year. There is enough business for everyone,'' Zulkiflee says.

Other scenarios

CIMB has stated its ambition to be among the Top Three in terms of market capitalisation in South-East Asia. Assuming that CIMB gets RHB Capital, the group assets of both banks would amount to RM391 billion compared with Maybank's RM380bil.

Maybank, traditionally the big brother, may not want to lose its pole position in terms of size. Therefore, it can just acquire one of the smaller banks as it needs slightly more than RM10bil more in assets to beat the combined CIMB/RHB group.

Industry observers point out that Maybank, especially with its recent acquisition of Kim Eng Securities, has a lot on its plate and may initially consolidate the accounts but not integrate whichever smaller bank it buys.

Some also suggest that other smaller banks can include Bank Islam and Bank Muamalat which may also be acquisition targets, especially when Maybank has stated its intention to be top Islamic bank in the Asean region.

In its financial results last year, Bank Islam recorded 18 months' pre-tax profit before zakat that surpassed half-a-billion ringgit, on strong financing growth, improvement in asset quality, increases in non-fund backed income and deposits as well as lower cost to income ratio.

For the 15-month period ended March 31, 2010, Bank Muamalat posted a profit before tax of RM143mil. “This year, for the nine-month period alone, the bank has recorded a profit before tax of RM173mil,” CEO Datuk Mohd Redza Shah Abdul Wahid had said.

Conclusion

As aptly pointed out by Sng, a good bank is not only about size. “All good banks have low cost to income ratios, predictability of earnings, good return on equity, high capital adequacy ratios and strong liquidity.''

Real returns to shareholders, compounded over time, is what matters. Size gives safety.

There is the “too big to fail” theory. But in Malaysia, bank failures are not likely to occur because there is a strong central bank, industry observers say.

The banks that mostly failed in the wake of the US subprime problem were big banks while a lot of small banks are still in business,

“Ultimately, the market decides. Banks by and large operate in unforgiving environments and can't afford to make mistakes, irrespective of size,'' Sng notes.

Overall, there should be more customer surveys on the sort of banking landscape they prefer.

Zulkiflee notes that the same customers of big banks also use the smaller banks for certain reasons and relationships.