BMST5103/MAY2009-F/FA

PART A INSTRUCTIONS: 1. THERE ARE SIX (6) QUESTIONS IN THIS PART. 2. ANSWER ALL QUESTIONS.

Bank Mergers in Malaysia

The 1997 Asian financial crisis caused a broad decline in the bank equity prices in the global market. It thus had created a new phase in the bank merger wave worldwide. During the crisis, bank mergers were aimed at consolidating mega-banks global reach as large banks began competing to expand globally. This had posed a threat to the financial industry in Malaysia. The Asian financial crisis that struck Malaysia during the period of 1997-1998 further exposed the vulnerabilities of small-sized banking institutions in Malaysia, and underlined the urgent need for these institutions to maintain a high level of capitalization in order to survive in the industry, and overcome any probable future financial crisis.

In July 1999, Bank Negara Malaysia (BNM) announced a massive consolidation of fiftyeight financial institutions into six core banking groups. In the following month, a list of six anchor banks was made public. Two months later, due to strong protests BNM revised the merger scheme by allowing domestic banks to choose their own partners and leaders. In the middle of February 2000, BNM identified ten anchor banks as part of the merger scheme. The ten selected anchor banks were Malayan Banking, Bumiputra Commerce Bank, RHB Bank, Public Bank, Arab Malaysian Bank, Hong Leong Bank, Affin Bank, Eon Bank, Southern Bank and Alliance Bank.

The policy-guided bank merger exercise was a drastic step taken by BNM in the history of Malaysian financial industry. Eighty-two percent of the nations domestic financial institutions were swept away by the 1999 bank merger wave. According to BNM Annual Report 2001, the main objective of the forced bank merger policy was to restructure and recapitalise domestic banks so as to increase their international competitiveness, reduce the number of bankruptcies in the financial system, and strengthen the banks overall financial position as well as to increase the equity value of banks.

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The main drive behind the consolidation of domestic banks in Malaysia was globalisation. During the Asian financial crisis, there was an urgent need to speed up the merger process in the banking sector so as to prepare the domestic banks for increased competition in an intensely competitive global business environment. In this regard, the domestic banks which were involved in the bank merger programme had to undergo a time-consuming process of capital rationalisation, staff redeployment and reorganisation, relocation of bank branches, optimisation of capacity utilisation, and consolidation of delivery channels so as to enjoy the benefits of economies of scale, and gain competitive advantage in a challenging, borderless banking environment.

Moreover, the increased pressure of liberalisation of financial services imposed by the World Trade Organisation (WTO) with effect from the year 2003 had also provided a driving force to the drastic domestic bank mergers in Malaysia. Since the incremental implementation of the Financial Sector Master Plan (2001-2010), the financial services sector in Malaysia has been undergoing significant transformation In line with its progressive liberalisation schedule. The Plan states that domestic merchant banks, commercial banks, investment banks, and financial companies are encouraged to merge into one single anchor banking group so as to strengthen their capitalisation and repositioning in the industry. The aim of the Master Plan is to create diversification in the financial structure and strengthen the Malaysian financial system before allowing the entry of foreign players to compete in a liberalised global banking environment. The Plan is currently in its third phase of implementation. In 2007 Malaysia opened up its banking industry to new foreign players in line with the WTO banking sector liberalisation programme.

The 1999 bank merger plan was premised on the concept that larger and better capitalised banking sector was more competitive and efficient, and would therefore be financially more viable to meet the challenges of a liberalised global market. In February 2000, BNM outlined the merger processes with the following guidelines:

a. The need to structure the mergers in such as way so as to reap the maximum synergy from the merger, and improve the profitability and efficiency of the proposed banking groups; b. The need to ensure minimal disruption in the provision of banking services following the rationalisation of branches and employees; 2

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c. The need to minimise post-integration costs that may otherwise affect the viability of the merged entity; and d. The need to ensure that each bank group is of sufficient size. In this regard, upon completion of the merger exercise, each banking group was to have a minimum shareholders funds of RM2 billion as an asset base.

According to some domestic bankers, mergers and acquisitions are effective only in a banking sector that has too many banks for a small economy like Malaysia. It is beneficial to banks that have a high rate of non-performance loans resulting partly from low efficiency and low effectiveness. The main purpose of a bank merger is to strengthen the capitalisation and operations of the merging banks. More importantly, it is aimed at obtaining the benefits of economies of scale in terms of minimal duplication of facilities and operations, optimum capacity utilisation, broadening of the scope of operations, reduction of intense competition, reduction of fixed and operational costs, increase of market segments, and better market control. The merging banks will enjoy the benefits of stronger capitalisation, higher liquidity, more cash flow for investment funds, more tax savings, strengthening of the balance sheet, enhancement of market share, reduction of competition, gaining of competitive advantages. On the other hand, bank mergers may result in problems of incompatibility of top management in strategy formulating and operations, culture shock experienced by employees of merging banks, increased business complexity and conflicts, cost-saving layoffs resulting from staff restructuring, loss of some good organisational values of the merging banks, and reduction of consumer utility.

The impact of the bank merger is not clear as a result of limited research on this issue. However, one very clear observation is that domestic banks started to outsource banking activities. In 2000, banking institutions were given a blanket approval by BNM to outsource noncore functions to third-party resident service providers. For example, Standard Chartered Bank outsourced its call centre operations to Price Solution Sdn Bhd., and Maybank outsourced its Information Technology infrastructure to Computer Science Sdn Bhd. It was reported that the information technology (IT) outsourcing initiatives would contribute to cost savings through internal processes and economies of scale, reduced risks of managing complex IT environment, achieving of world-class IT services comparable with the financial institutions, and expansion of the career opportunities for the IT staff. The key functions outsourced by the banks included positing of statements, office automation maintenance, data centre operations and infrastructure, system maintenance, network operations, ATM cash management, and e-mail operations. The 3

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trend towards outsourcing activities allowed financial institutions to embark on specialisation into specific product markets. Consequently, instead of a growth in the number of total domestic banks, product specialisation had become the main focus of the merged banks, resulting in cost-savings, productivity increase, and efficiency upgrading. In this context, a larger customerbase and a stronger capital-base of the merged domestic banks seemed to have strengthened the resilience of the Malaysian banking industry as a whole.

Since the industry-wide bank merger exercises were completed in 2001, not much indepth research has been done regarding the effects of the merger policy on the productivity of domestic banks. However, some studies conducted on the post-merger Malaysian banks have indicated a gradual increase of productivity and efficiency growth, resulting in a stronger and more resilient financial industry. Recently, a prominent Malaysian domestic banker remarked that the financial sector mergers in Malaysia that took place in 1999, after the 1997 Asian financial crisis, have proven to be effective as demonstrated by the capability and resilience of local banks to deal with the current round of global financial crisis.

Source: The case was edited and modified by Dr. Chin Tiam Pok based on the following sources: 1. Bank Negara Malaysia (2002) "Annual Report 2001 2. Bank Negara Malaysia (2001)."Financial Sector Masterplan" Kuala Lumpur: Bank Negara Malaysia. Available online at:http://www.bnm.gov.my (23 March 2007) 3. BNM Press Release, 14 February 2000:www.bnm.gov.my 4. Bank Negara Malaysia website:www.bnm,gov.my 5. Bernama Business News (12 January 2009)

Question 1

Critically examine FOUR (4) driving forces, either external or internal, that led to the launching of the bank mergers scheme initiated by BNM in 1999. [12 marks] Question 2

What was the main objective of the bank mergers scheme initiated by BNM? [4 marks]

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Question 3

To what extent the Malaysia Financial Sector Master Plan (2001-2010) was related to the bank mergers scheme? [4 marks]

Question 4

Discuss FOUR (4) principles to be observed in the process of implementing the bank mergers scheme as proposed by BNM. [8 marks]

Question 5

Discuss TWO (2) post-merger effects on the domestic banking operations in Malaysia. [6 marks]

Question 6

In your opinion, has the bank mergers scheme been a success? Give TWO (2) reasons to support your answer. [6 marks] [TOTAL: 40 MARKS]

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PART B INSTRUCTIONS: 1. THERE ARE FIVE (5) QUESTIONS IN THIS PART. 2. ANSWER THREE (3) QUESTIONS ONLY.

Question 1

a.

Discuss the key components of the strategic management process. [10 marks]

b.

Examine the reasons why many companies still encounter corporate failure even though they have zealously implemented strategic management. [10 marks] [TOTAL: 20 MARKS]

Question 2

a.

What is corporate governance? [4 marks]

b.

To what extent is the board of directors is involved in the strategic management process? [6 marks]

c.

Is profit-making the only overall objective of a business corporation? Discuss. [10 marks] [TOTAL: 20 MARKS]

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Question 3

a.

Based on Porters Five-Force Model, examine the factors that determine the intensity of competition in an industry. [10 marks]

b.

Select an industry in Malaysia, and based on Porters Five-Force Model, evaluate the intensity of competition within the selected industry. [10 marks] [TOTAL: 20 MARKS]

Question 4 a. With the aid of a diagram, discuss concisely Porters THREE (3) generic strategies. [10 marks] b. In times of current economic downturn in Malaysia, how can companies pursuing costleadership strategy, product differentiation strategy, or focus strategy sustain their competitive advantage? [10 marks] [TOTAL: 20 MARKS] Question 5

a.

Discuss the main components of the process of strategy evaluation and control. [6 marks]

b.

Examine TWO (2) reasons why ineffective strategy evaluation and control may cause strategy implementation to fail? [4 marks]

c.

What is a balanced scorecard? Discuss THREE (3) benefits of using a balanced scorecard in strategy evaluation. [10 marks] [TOTAL: 20 MARKS] QUESTION PAPER ENDS HERE