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Nazir’s plans for CIMB face stiff challenges

Over the last 15 years, CIMB’s chief executive officer Datuk Seri Nazir Razak has always enjoyed the backing of international institutional investors for the multi-billion-dollar deals that have transformed the Malaysian banking group into a regional powerhouse.

Now, as he pushes ahead with his biggest deal ever – a US$10-billion three-way mega merger that will turn CIMB into Malaysia’s largest financial institution and Southeast Asia’s fourth largest banking group – Nazir is discovering that the markets are less than excited.

Pricing issues and the likelihood that it will force CIMB away from a strategy focused on the region to one targeting the domestic market are among the chief bugbears for local and foreign investors. The deal calls for a three way merger with RHB Bhd, a mid-sized bank, and Malaysia Building Society Bhd, a large lender to the country’s real estate sector.

Poor investor sentiment aside, the proposed merger, which was announced two weeks ago, is also facing stiff opposition from one of RHB’s major shareholders.

Aabar Investments, a powerful Abu Dhabi state-owned sovereign fund with strong ties to Malaysia’s political establishment, has declared its opposition to the deal and is threatening to block it unless it gets a huge premium for its 21.4% stake in RHB.

Closer to home, the 48-year-old Nazir is receiving a hostile response from his rival Malayan Banking Bhd, which doesn’t want to lose its top spot as the country’s largest lender.

Senior financial executives close to the situation say that international banking group Goldman Sachs is already courting senior Maybank executives with proposals for a rival bid for RHB and Malaysian Building Society.

The new proposed CIMB-led group would have total assets of US$194 billion (RM616.2 billion) and a 23% share of the domestic loan market compared with Maybank’s 18%.

Even if CIMB succeeds in pushing ahead with the merger, fund managers say that integration issues will dog the new enlarged financial institution. That is because Nazir, who is also Prime Minister Datuk Seri Najib Razak’s youngest brother, won’t be around to deliver on the promised synergies.

Nazir (pic, left), who declined to be interviewed for this article, recently announced plans to relinquish his position as CEO to take over as chairman of CIMB’s board of directors in September.

“Long-term followers of CIMB are imputing a ‘Nazir discount’ to everything CIMB does, because he won’t be in the driver’s seat,” says a senior CIMB executive.

But this executive and others in Nazir’s inner-circle of advisers say that concerns over the mega merger plans and Nazir’s less-than-hands-on role are misplaced.

“He will continue to provide the strategic leadership,” says a senior official of state-owned Khazanah Nasional Bhd, which owns a commanding 29.19% interest in CIMB.

CIMB’s proposed mega merger is shaping up to be Malaysia’s biggest corporate drama of the year. For starters, the deal features the country’s most powerful investors.

Apart from Khazanah, the other big player is state-owned Employees Provident Fund, which controls a 14. 46%t stake in CIMB, a 41.34% stake in RHB and a 65% stake in Malaysia Building Society. Both state-owned funds dominate Malaysia’s corporate landscape with huge holdings in the country’s top listed entities.

The Malaysian players have also lined-up the services of top international banking groups.

Khazanah and CIMB have engaged Morgan Stanley and J. P. Morgan, respectively, as advisers, while the Employees Provident Fund and RHB have enlisted the services of Deutsche Bank and Credit Suisse.

How the deal plays out will depend on politics.

“At the end, this deal will fly if the PM says it is a go,” says a senior Malaysian financial executive involved in the merger plan.

He notes that Aabar is putting up a huge fight to oppose the deal and has already started lobbying the Malaysian government.

“There is generally backing from the government for the deal,” says a senior government official, who notes that Kuala Lumpur is keen to see the merger proceed, because it will create a banking group that will be able to rival the large Singapore banks that dominate the financial landscape in Southeast Asia.

“But ultimately, it will be up to the PM, as he will need to weigh the government-to-government implications.”

Najib, who is also the Finance Minister, has yet to comment publicly on the proposed merger.

Nazir has played a central role in CIMB’s explosive growth over the last decade. He took what was then known as Commerce Asset-Holding and turned it into a major regional bank through strategic acquisitions.

After acquiring Indonesia’s Bank Niaga in 2002, Nazir added Singapore’s premier stockbroking firm GK Goh, Bank Thai and Malaysia’s Southern Bank to the group. The group underwent a major corporate overhaul and was renamed CIMB. In 2012, it acquired the Asia-Pacific investment banking units of the Royal Bank of Scotland to expand its regional reach.

Nazir and his team have spent much of the last decade extracting the many synergies from CIMB’s acquisitions and cutting through overlapping structures in its regional network.

But much still needs to be done, say investment analysts tracking the group.

For example, CIMB has the highest cost-to-asset ratio – an oft-used efficiency measure that calculates cost in relation to the size of the lender – among Malaysian banks at 2.27%, and J.P. Morgan research notes that RHB comes second at 1.69% and “these metrics suggest there are limited reasons for us to factoring a leaner post-deal operation”.

But Nazir’s advisers say that the many financial concerns can be addressed. One major consideration is to combine the Islamic operations of the three entities to create a mega Islamic bank, which some estimates suggest could generate annual revenues of as much as US$1 billion.

What’s more, the new entity could quickly be listed and the initial public offering would raise substantional capital to reduce debts.

This executive and others in Nazir’s inner circle say the mega merger will also tackle growing internal concerns about uncertainly in key markets for CIMB, such as Indonesia and Thailand, where political tensions are starting to cloud economic prospects.

“Indonesia accounts for 30% of our exposures, so that is a key concern. With the merger, we will be bigger and stronger at home,” says the CIMB executive, who also notes that the merger would help the group bulk up its presence in Singapore from two branches to nine by taking over RHB’s operations in the island state.

Whether Nazir gets his way will depend on RHB’s main foreign shareholder. Abu Dhabi first emerged on the scene in 2008 when the state-controlled Abu Dhabi Commercial Bank acquired a 25% interest in RHB from the Employees Provident Fund for roughly RM3.9 billion (US$1.23 billion), valuing RHB at RM7.20 a share.

Three years later, the block held by the Abu Dhabi Commercial Bank was sold to another state-controlled entity call Aabar Investments, for RM10.80 a share.

Aabar, oil-rich Abu Dhabi’s most aggressive investment vehicle, which is controlled by Sheikh Mansour bin Zayed al-Nahyan, is upset by CIMB’s plans because it wasn’t fully appraised of the proposed merger.

It is also concerned about the potential hit on its investment should the deal be done at current prices.

RHB shares are trading at around RM9 a piece and Aabar has informed RHB and the Employees Provident Fund that it would block the planned merger if the deal does not cover the cost of its investment in RHB, which currently stands at RM11.94 (US$3.76) a share.

That could prove to be a deal breaker.

“There is no way CIMB will go for a deal which involved two pricing structures, and do a deal at Aabar’s asking price,” says a senior Kuala Lumpur banker. – The Edge Review, July 25, 2014.