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https://dinmerican.wordpress.com/2014/07/13/the-story-behind-cimbs-mega-islamic-bank-deal/

The Story Behind CIMBs Mega Islamic Bank Deal

July 13, 2014

The Story Behind CIMBs Mega Islamic Bank Deal

by Yvonne Tan@www.thestar.com.my (07-12-14)
With Islamic finance gaining global acceptance, its only
natural to set up the biggest Islamic bank in Malaysia.
INDIRECTLY, the seeds of the proposed merger between
CIMB Group Holdings Bhd, RHB Capital Bhd (RHB Cap) and
Malaysia Building Society Bhd (MBSB) were sown not in
Kuala Lumpur but in the worlds financial centre London.
When CIMB got the mandate to be one of the book runners
for the first Islamic finance sukuk raised by a sovereign in the
Western world, it was a sure sign that Islamic finance was
gaining wider acceptance. Upon returning to Kuala Lumpur,
CIMBs Chairman Datuk Seri Nazir Razak spoke to a group of
journalists during Invest Malaysia about how Islamic finance was at the tipping point for growth, considering that
the Western world was embracing it.
Its easy to fathom why.

No bank would want to fork out US$1bil to establish a mega-Islamic bank as the returns are not there.But the
landscape is fast changing and Nazir seized the moment.
On Thursday, he proposed the setting up of a mega-Islamic bank as part of a merger with RHB Cap and MBSB
that would possibly create the largest bank in the country and one of the largest in the region. The merger fulfils

Bank Negaras objective of the creation of a mega Islamic bank, says an investment banker.
RHB Caps decision last month to call off its Indonesian PT Bank Mestika Dharma proposed buy, which it had
been pursuing since 2009, as well as Nazir taking over as chairman effective September 1, were the telling signs
of a much bigger plan that was brewing.
The three financial institutions announced this week that they had received the green light from Bank Negara to
start exclusive talks for the proposed merger, which includes the formation of a mega-Islamic bank.
In this respect, MBSB, an Islamic financial institution, is slated to fill that role in the merger.Nazir says Islamic
finance is at the tipping point for growth, considering that the Western world is embracing it. The parties have 90
days to decide on the pricing, structure and other relevant terms and conditions. Bank Negaras approval is valid
for six months from Thursday.
Amidst this, questions are being raised as to why there is an exclusivity clause in the 90-day agreement, which
essentially means that there will not be any competing bids for RHB Cap during this period, suggesting that
shareholders may be missing out on more competitive bids.
There are two reasons for this. One is that RHB Cap is not being sold; it is a merger candidate, and secondly, it is
to minimise disruptions, says an official close to the Employees Provident Fund (EPF).
The fact that Bank Negara gave the three institutions approval
in less than 24 hours after they wrote to it is a sure sign that it
is not against the merger.If the mega-bank materialises, then it
will not be difficult to see why it will easily give the countrys
current largest bank Malayan Banking Bhd (Maybank) a
run for its money.
Based on latest figures, the merged entitys asset size is
expected to be more than RM600bil, market value close to
RM90bil and combined profits exceeding RM7bil.It will
surpass Maybank, which had an asset size of RM578bil as of
March 31.
CIMB has a strong commercial presence in Indonesia which is a major contributor to the groups earnings.
Operationally, RHB Cap and CIMBs resources combined will give a boost to the merged entitys regional
presence.
For one, RHB Cap, which has a full banking licence in Singapore enabling it to venture into diverse businesses
consumer banking, business banking, corporate banking, treasury and investment banking intends to grow this
aggressively over the next few years. This will complement CIMBs Singapore operations.
CIMB, meanwhile, has a strong commercial presence in Indonesia something which RHB Cap is lacking via
its PT Bank CIMB Niaga Tbk, which is a major contributor to the groups overall earnings.
Valuations
There is no doubt that the merged entity will be huge.Its market capitalisation will be more than RM90bil,
assuming the deal is concluded at about 1.70 to 1.75 times book value.
According to a source, the deal is likely to be done at 1.75 times book value based on CIMBs current valuation of
almost 1.70 times book and unlikely to be transacted at anything less.Recall, in 2012, RHB Cap had paid 1.77
times book value for OSK Investment Bank, lower than the 1.9 times book value Maybank had paid for Kim Eng
Securities.
In this current merger deal, the EPF is said to be the main driver because it has significant stakes in all three
entities.It is the major shareholder in RHB Cap with a 40.76% stake. The other major shareholders of RHB Cap

are Aabar Investments PJSC with a 21.43% stake and OSK Holdings Bhd with a 9.91% stake.
The EPF has a 64.73% stake in MBSB and is the second-largest shareholder in
CIMB with 14.46% after Khazanah Nasional Bhd.
It has been learned that the exercise would possibly involve a share swap
between CIMB and RHB Cap at a book value of 1.75 times and an outright
buyout of MBSB. The eventual merger will see the EPF emerge as the largest
shareholder in the mega-bank, with a stake estimated to be more than 25%.
RHB Cap had been a takeover target as far back as three years ago, with both
CIMB and Maybank being its suitors. However, the deal fell through because
Aabar wanted a higher valuation. Nevertheless, RHB Cap has always been
viewed as a takeover target even with the entry of OSK two years ago. This is
because the block in RHB Cap that belongs to Aabar from Abu Dhabi has always
been viewed as being up for sale and could be used as a launch pad to take
over the bank.
Even in May, Taiwanese financial group Mega Financial Holding Co Ltd was reportedly in talks to buy into RHB
Cap, leading to speculation that the interested seller was Aabar.
Aabar acquired its stake in RHB Cap from its sister company, Abu Dhabi Commercial Bank PJSC, for RM5.9bil or
RM10.80 apiece in 2011, valuing RHB Cap at a hefty 2.25 times its book value then. The transaction between the
two related companies was done to set the price for RHB Cap, should there be a takeover.
However, RHB Caps share price has never reached that price over the past few years.The counter was traded at
RM8.72 on Wednesday before suspension.
Assuming the deal is concluded at 1.70 times, RHB Caps share will be worth RM11.40 per share, a 5.6 %
premium to Aabars cost of RM10.80. But would Aabar be agreeable, or would it seek higher valuations?
Past Deals
RHB Cap, currently the fourth-largest banking group, is no stranger to banking deals.The latest is its merger with
OSK Investment Bank that was completed about two years ago. However, its merger and acquisiton history goes
back much further than this.
The RHB Banking group assumed its current name only in 1997.It came about via a merger between Kwong Yik
Bank Bhd and DCB Bank Bhd (formerly known as Development and Commercial Bank Bhd) in 1997. That year
saw entrepreneur Tan Sri Abdul Rashid Hussain emerge as the groups executive chairman. The banks current
initials are based on his name.
Kwong Yik Bank was founded by the Chinese community led by Wong Loke Yew, or better known as Loke Yew, in
July 1913, while DCB Bank was established in 1966 by the-then Finance Minister Tun Sir Henry H S Lee.
In the aftermath of the 1997/98 Asian financial crisis, the troubled Sime Bank Bhd (formerly known as UMBC
Bank) was merged into the RHB Banking group in 1999.Four years later, when Kuching-based Bank Utama Bhd,
the banking arm of Cahya Mata Sarawak Bhd, became the latest bank to be merged into the RHB Banking group,
Rashid made his exit from the group.
CIMB is also the result of a merger between CIMB, Bumiputra-Commerce Bank and Southern Bank Bhd which
was completed in 2006. Both the RHB and CIMB groups have gone through more than their fair share of
mergers. But this merger, if it happens, will probably be the last stop for RHB Cap, a bank founded by Rashid
Hussain.
Between the two, CIMB Group has a bigger franchise in the region, a larger pool of tested managers and is likely
to take the lead.This is something the EPF is not likely to object because it will enable the pension fund to go back

to its role as a passive investor in financial institutions.