Volume 30 Number 4 2003 1

Mergers and Acquisitions of Banks in Malaysia

by Bala Shanmugam, Director of Banking and Finance Unit, School of Business, Monash
University Malaysia, No.2, Jalan Kolej, Bandar Sunway, 46150 Petaling Jaya and Ma-
hendran Nair, Head of School of Business, Monash University Malaysia, No.2, Jalan
Kolej, Bandar Sunway, 46150 Petaling Jaya

Abstract

The recent wave of mergers and acquisitions in the financial institutions all over the de-
veloped nations has also taken its toll in Malaysia. Factors such as globalization, liberali-
zation and information technology developments have contributed to the need for a more
competitive, resilient and robust financial systems in Malaysia. This is added by the re-
cent 1997 Asian financial crisis, which contributed for speeding the mergers and acquisi-
tions process in the Malaysian banking sector. The end result is the formation of ten
anchor banks from a total of 54 financial institutions as at end of 2001. This paper has ex-
plored the causes and the process of the mergers and acquisitions as well as the future im-
plications in the Malaysian banking system.

Introduction

Mergers and acquisitions of banks are not exactly recent phenomena for Malaysia. As
early as 1932, Malaysia (then known as Malay States) witnessed the merger of Ho Hong
Bank, The Chinese Commercial Bank and the Oversea Chinese Bank to form Oversea
Chinese Banking Corporation (OCBC). Also in the late 1960’s, Hong Kong and Shang-
hai Bank had procured the whole share capital of the Mercantile Bank while Chartered
Bank acquired the Eastern Bank (Drake, 1969).

This has been an ongoing activity as warranted by market forces. The initial recent
merger in the financial industry occurred in 1990 with the takeover of United Asian Bank
by Bank of Commerce. This entity subsequently merged with Bank Bumiputra to form
Bank Bumiputra Commerce on 1 October 1999. The second mergers saw the takeover of
Kwong Yik Bank by Rashid Hussain Group in late 1996 to form RHB Bank; Sime Bank
subsequently joined the RHB Group in June 1999. The central bank, Bank Negara Malay-
sia (BNM) has always encouraged such moves. However, the ‘severity’ of the encourage-
ment peaked following the Asian financial crisis.

The Asian financial crisis of the late 90’s revealed the extent of the vulnerability
of financial institutions to exogenous factors. The capacity of financial institutions to ab-
sorb economic downturns was put to question. Economic theory suggests that a firm’s
capital is supposed to act as a cushion to withstand losses. Hence the question of capacity
to absorb losses was linked to capital size and in turn the overall size of the institution.

The Central Bank, accordingly decided to force banks to merge. On 29 July 1999,
BNM announced that there should only be six banks in Malaysia and they were termed as
‘anchor’ banks: Maybank, Bumiputra Commerce Bank, Public Bank, Perwira Affin Bank
and Southern Bank. Following much lobbying from various quarters against this decision
the government decided to increase the number from six to 10. In February 2000, BNM
announced a merger program for the creation of 10 anchor banking groups, which were to
Managerial Finance 2

form the nucleus of the entire financial system. The program sought to reduce 54 finan-
cial institutions to 10.

Causes of Merger

In addition to the inherent weakness in the banking system detected during the financial
crisis, there was an urgent need to accelerate the merging of the banking system in the
face of a more competitive and globalized business environment. The need to merge was
made all the more imperative given the increased pressure under the terms of an agree-
ment, which was worked out under the auspices of the World Trade Organization that
called for the liberalization of financial services from the year 2003. The crisis also dem-
onstrated the vulnerabilities of the smaller banking institutions. These merged domestic
banking groups would then be well positioned to meet the demands of the changing do-
mestic economic structure and future challenges from globalization and liberalization.
This entailed the opening up of domestic financial markets to global players, which had
in turn led a number of countries (example Thailand, Indonesia, etc.) to announce or im-
plement plans to consolidate their banking system.

The latter plan was premised on the notion that larger and better-capitalized bank-
ing groups were more competitive and efficient and would therefore be more able to meet
the challenges of a liberalized market place. BNM outlined the merger and acquisition
processes as follows:

1. The need to structure the mergers in such a way so as to reap the maximum
synergy from the merger so as to improve the profitability and efficiency of
the proposed banking groups;

2. The need to ensure minimal disruption in the provision of banking services

following the rationalization of branches and employees;

3. The need to minimize post-integration costs that may otherwise affect the vi-
ability of the merged entity; and

4. The need to ensure that each banking group is of a sufficient size. In this re-
gard, upon completion of the merger program, each banking group was to
have a minimum shareholder’s funds of RM2 billion and asset base of at least
RM25 billion.
(BNM Press Release, 14 February 2000)

Merging of the banking industry was said to integrate the entire banking sector by
making it both more competitive and efficient. Such merging were best implemented
when the banking system was fundamentally strong, as the costs associated with the same
would be significantly lower than if the merging were proposed during times of crisis.

However, it was also important that these mergers had to be implemented on a fair
and equitable basis with maximum transparency so that it will be a ‘win-win’ situation for
all the participants. The greater efficiency was to come about through savings from a re-
duction in manpower and branch networks, as well as from an increased use of up-to-date
information technology.

Original Anchor Banking Group
1. Affin Bank Berhad Group
Perwira Affin Bank Berhad
Asia Commercial Finance Berhad
Perwira Affin Merchant Bank Berhad
2. Alliance Bank Berhad Group
Multi-Purpose Bank Berhad
3. Arab-Malaysian Bank Berhad Group
Arab-Malaysian Bank Berhad
Arab-Malaysian Finance Berhad
Arab-Malaysian Merchant Bank Berhad
4. Bumiputra Commerce Bank Berhad Group
Bumiputra Commerce Bank Berhad
Bumiputra Commerce Finance Berhad
Commerce International Merchant Bankers Bhd
5. EON Bank Berhad Group
EON Bank Berhad
EON Finance Berhad
Table 1: Ten Banking Groups
Merged With
BSN Commercial Bank (M)Berhad
BSN Finance Berhad
BSN Merchant Bankers Berhad
International Bank Malaysia Berhad
Sabah Bank Berhad
Sabah Finance Berhad
Bolton Finance Berhad
Amanah Merchant Bank Berhad
Bumiputra Merchant Bankers Berhad
MBF Finance Berhad
Oriental Bank Berhad
EON Finance Berhad
Perkasa Finance Berhad
Malaysian International Merchant
Bankers Berhad
Resultant Entity After Merger
Affin Bank Berhad
AFFIN ACF Finance Berhad
Affin Merchant Bank Berhad
Alliance Bank Berhad
Alliance Finance Berhad
Alliance Merchant Bank Berhad
Volume 30 Number 4 2003
Arab-Malaysian Bank Berhad
Arab-Malaysian Finance Berhad
Arab-Malaysian Merchant Bank Berhad
Bumiputra Commerce Bank Berhad
Bumiputra Commerce Finance Berhad
Commerce International Merchant
Bankers Berhad
EON Bank Berhad
EON Finance Berhad
Malaysian International Merchant
Bankers Berhad
3
 Table 1: Ten Banking Groups
Original Anchor Banking Group Merged With
6. Hong Leong Bank Berhad Group
Hong Leong Bank Berhad Wah Tat Bank Berhad
Hong Leong Finance Berhad Credit Corporation (Malaysia)Berhad
7. Malayan Banking Berhad Group
Malayan Banking Berhad The Pacific Bank Berhad
Mayban Finance Berhad PhileoAllied Bank (M)Berhad
Aseambankers Malaysia Berhad Sime Finance Berhad
Kewangan Bersatu Berhad
8. Public Bank Berhad Group
Public Bank Berhad Hock Hua Bank Berhad
Public Finance Berhad Advance Finance Berhad
Sime Merchant Bankers Berhad
9. RHB Bank Berhad Group
RHB Bank Berhad Delta Finance Berhad
RHB Sakura Merchant Bankers Berhad Interfinance Berhad
10. Southern Bank Berhad Group
Southern Bank Berhad Ban Hin Lee Bank Berhad
United Merchant Finance Berhad
Perdana Finance Berhad
Cempaka Finance Berhad
Perdana Merchant Bankers Berhad
Source: Bank Negara Annual Report 2001, p.111
Resultant Entity After Merger
Hong Leong Bank Berhad
Hong Leong Finance Berhad
Malayan Banking Berhad
Mayban Finance Berhad
Managerial Finance
Aseambankers Malaysia Berhad
Public Bank Berhad
Public Finance Berhad
Public Merchant Bank Berhad
RHB Bank Berhad
RHB Delta Finance Berhad
RHB Sakura Merchant Bankers Berhad
Southern Bank Berhad
Southern Finance Berhad
Southern Investment Bank Berhad
4
Volume 30 Number 4 2003 5

Merging to Ten Banking Group

As at 31 December 2001, 52 of the 54 banking institutions had been merged into 10 bank-
ing groups. The central bank's consent to the new groupings was in the view that it might
pave the way for a strong, efficient and competitive banking sector, which would be able
to handle the assault of globalization and liberalization (BNM, 2001). Effectively, after
the completion of the merger program the number of domestic banking institutions was
significantly reduced to 10 domestic banking groups consisting of 10 commercial banks,
10 finance companies and nine merchant banks (Table 1). BNM permitted the domestic
banking institutions to form their own banking groups as to meet the minimum capital re-
quirement of RM2 billion and minimum total assets of RM25 billion. The anchor bank
status was granted to Malayan Banking, Bumiputra-Commerce Bank, RHB Bank, Public
Bank, Arab Malaysian Bank, Hong Leong Bank, Perwira Affin Bank, Multi-Purpose
Bank, Southern Bank and EON Bank (See Appendix 1 for merger programme details).
The merger process, which involved consolidation of 51.75% (excluding Bank Utama
Berhad's assets of 1.8%) of the total assets of the banking institutions (commercial banks,
finance companies and merchant banks), was achieved at a minimum interference and
disarticulation to the financial system (BNM, 2001).
Table 2: Size of Banking Groups (RM million)
Banking Groups Loans Assets
Total % Share Total % Share
Malayan Banking1 92,654.0 21.1% 149,897.3 25.4%
2
Commerce Assets-Holding 42,214.9 9.6% 74,370.3 12.6%
RHB Capital 35,465.5 8.1% 56,045.5 9.5%
3
Public Bank 23,400.6 5.3% 44,234.6 7.5%
AMMB Holdings4 7,878.6 1.8% 10,926.7 1.9%
Hong Leong Bank5 22,127.5 5.0% 39,543.6 6.7%
Affin Holdings 92,953.6 21.1% 15,646.4 2.7%
Southern Bank 16,150.8 3.7% 23,446.4 4.0%
EON Bank 15,829.4 3.6% 24,813.0 4.2%
6
Alliance Bank 12,473.5 2.8% 17,119.7 2.9%
Utama Banking Group7 4,537.8 1.0% 9,619.8 1.6%
Foreign Banks 74,125.0 16.9% 124,302.7 21.1%
Total 439,811.2 100% 589,966.0 100%
Note:
*The above represents the proforma statistics of the banking groups compiled by a simple amalgamation
of the total loans and total assets of the anchor bank and its mergers partners based on the latest
available balance sheets.
**Unless stated otherwise figures are as at 31 December 2000
1. As at 30 June 2001.
2. As at 31 December 2001
3. As at 31 December 2001
4. As at 30 September 2001
5. As at 30 June 2001
6. As at 31 March 2001
7. As at 30 June 2001
Source: Individual Banks' Annual Report
Managerial Finance 6

Malayan Banking Bhd and Bumiputra-Commerce Bank Bhd (BCB) emerged as the
strongest banks with 24.7% and 12.3% of market share respectively in 2001 (Table 2).
Despite the fact that 52 of the 54 financial institutions have already completed their merg-
ers process, foreign banks in Malaysia still constituted a fairly large market share of about
21% of total assets. Those foreign banks, which still remained dominant in the local
banking sector, include HSBC, Standard Chartered, OCBC, and Citibank (Table 3) (Ooi
and Tan, 2002).

Table 3: Market Ranking of Foreign Banks in Malaysia (as at end of June 2001)
Banks Assets Loans and Advances
HSBC 1 2
OCBC 3 1
Standard Chartered 2 3
Citibank 4 4
UOB-OUB combined 5 5
Source: Ooi and Tan (2002)

The merger exercise is however still incomplete. The Utama Bank-RHB Bank
merger is still pending, and the deadline for banks which have not found merger partners
to either do so or meet the central bank’s capital requirement of RM2 billion had been ex-
tended. Negotiations had dragged on for almost a year but no agreement has yet been
inked. Utama-Banking Group (UBG) had failed to lock in an agreement in three previous
attempts, first with Affin Bank, and then with AMMB Holdings. The third strive was
with EON Bank but talks were called off before they could commence (Taing, 2002).

According to the Reuters report, UBG will somehow became an anchor in the pro-
cess of merging with RHB Bank, and that UBG would be expected to take control of the
merged entity via a controlling stake in RHB. UBG began talks to buy a 23.9% stake in
RHB from Tan Sri Rashid Hussain in April 2001 but negotiations had came to a standstill
over control and pricing issues (Reuters, 12 March 2002). Up till now, there are no indi-
cations that both banks are ready to announce a deal. This stalemate has delayed a merger
programme that will otherwise complete a government-ordered consolidation of the
country’s 54 financial institutions into 10 core banks.

To facilitate the merging process the Central Bank presented a model for the valua-
tion of merging banks. The maximum possible value was given to shareholders so as to
keep the equity market stable. It was important that the valuation of shares of each finan-
cial institution was fair to all shareholders.

Consequences of Mergers

The creation of the ten domestic financial groups was to ensure that the domestic banking
institutions would be able to withstand pressures and challenges arising from globaliza-
tion and competitive global environment. This move towards merging was in line with
the Government’s policy not to bail out weak companies but to rationalize businesses so
as to become more viable. Business consolidation through mergers is indeed a common
practice globally to achieve economies of scale and higher productivity.
Volume 30 Number 4 2003 7

In this time and age of globalization, banks must merge to survive the pressure of
greater competition. Many Asian nations had already moved towards merging their bank-
ing system and Malaysia is no exception.

The IMF too had forced countries under their programs (example Indonesia, Thai-
land and South Korea) to reduce the number of banking institutions by effectively closing
them down. Malaysia did not believe that the IMF prescription of closing down the prob-
lematic banks was the route to follow, as the social costs involved in terms of dislocation
of resources were high. A more reasonable approach adopted by Malaysia was the guided
merger, with the central bank playing a proactive role in solving the issues involved and
the principle of fairness was strictly applied to all parties in the merger. Without the
merger, the smaller financial institutions may disappear as a result of globalization and
increased competition. There is actually no place for family run banks to survive in the
long run.

Analysts had been keeping an eye on the bank merger programme for the effect of
mergers on loans growth, cost savings achieved, post-merger staff retrenchment, en-
hancement of return on equity and time lag for completion of mergers. Although the
mergers have been government-ordered, it was also driven by the need to recapitalize dis-
tressed institutions after the financial crisis, which began in July 1997. The banking insti-
tutions were busy preserving the quality of their balance sheets and coping with the
erosion in their capital instead of generating new loans.

The pullback effect in loan activities posed a potential disruption to the smooth
functioning of the intermediation process and threatens to push the Malaysian economy
into deeper recession. (The Star, 2001)

To determine the impact of mergers on bank profitability, ratios such as return on

assets (ROA) and/or return on equity (ROE) before and after merger relative to peer
groups of banks that did no engage in mergers had been used in a number of studies.
Some found improved profitability ratios associated with mergers (Rhoades, 1998) al-
though others, such as Berger and Humphrey (1991) and Chamberlain (1998) found no
improvement in these ratios. Notably, the Malaysian Banking system recorded a signifi-
cant increase of 107.5% in pre-tax profit for the calendar year 2000 after the merger pro-
cess took off with increased ROA to 1.5% from 0.7% in 1999. Consequently the return on
equity increased significantly from 9.8% in 1999 to 20.4% in 2000 providing the testi-
mony that the banking system had recovered and there was perceived improvement in
productivity. The mergers seem to have eliminated excess capacity more efficiently than
bankruptcy or other means of exit in part preserving the financial institutions product and
services.

However, there was a 2% reduction in net interest income in 2001 with a decreased
of ROA to 1.1% and ROE decreased to 14.5% (BNM, 2001). Nonetheless, despite lower
growth in real GDP, growth of total loans and advances was sustained at RM20.5 billion
in 2001 (RM24.6 billion in 2000).

This slowdown, which was primarily a consequence of the global economic down-
turn, had affected the domestic economy through lower exports earnings, unfavorable
business sentiment and short-term speculative activity (BNM, 2001). With the banks
strengthening again, loans growth is forecasted to increase to 7% in 2002 compared to
Managerial Finance 8

5.5% in 2001 (Figure 1). On the other hand, some domestic banks had lost a substantial
portion of profit to non-performing loans (NPLs).
The higher loan loss provisions charged by the banking system in 2001 were the re-
sult of the increase in the NPL (6-month classification) to RM60 billion as at end-
December 2001. The increase in loan loss provisioning expenses was partly due to anchor
banks having to realign the policies on loan loss provision of the acquired loan portfolios
to be in line with their more stringent standards. These were, however, one-off adjust-
ments, which in effect would place the banking system on a stronger footing as the ad-
justments were from minimum to more prudent standards. Hence, Malaysian banks
registered the highest NPLs at 18.2% in 2001 but are forecasted to decrease to 12% in
2002 (Figure 1). This indicated that mergers had not weakened the strength of the acquir-
ing banks and proved to be successful at combating balance sheet deteriorations. A sur-
vey done by Asiaweek (2001) indicated that of the 10 core domestic banks, six made it to
the top ten banks in Malaysia in terms of assets and profits.

Figure 1: Loan Growth and Non-Performing Loans of Malaysian Banks (2000-2002)

20
18.2%
18

16

14
12% 12%
(%)
Percentage (%)

12
Percentage

Loan Growth (%)

10
Non-P erforming Loans (%)
8 7%
5.5%
6

4 3%

0
2000 2001(F) 2002(F)
Ye a r

Source:Asiaweek,14 September 2001

[http://www.asiaweek.com/asiaweek/features/financial500.2001/capsule_malaysia.html]

Merger in general is a complex proposition given the best of conditions and despite
their appeal, only a small percentage, ultimately makes it. Often rather than not, the meas-
ures implemented may result in disruption rather than construct competence within the
industry (Gunasegaran, 2002). Even as the mergers came through, other problems may
emerge such as systems and staff integration, staff cuts and bank branches closure, reju-
venating confidence, and refocusing on business. The issue of human capital is crucial in
Volume 30 Number 4 2003 9

the first stages of merger and it always begins with the employees who might start leaving
because they get demoralized (Cane, 2001). In order to minimize the difficulties in-
volved, particularly to those directly employed in the industry, an attractive retrenchment
scheme was devised in Malaysia where the costs were borne by the merged entities.
Those retrenched were granted the opportunity for diverse options of relocation to other
suitable business sectors, or to opt for the voluntary separation schemes (VSS).
Table 4: Top 10 Banks in Malaysia (2001)
Ranks Institution Assets Profits Profits as
($ Million) ($ Millions) % of
Assets Equity
1 Malayan Banking 33,506 358.0 1.1% 13.1%
2 Bumiputra-Commerce Bank 16,626 119.2 0.7% 11.3%
3 RHB Bank 13,319 103.0 0.8% 8.7%
4 Public Bank 11,641 188.6 1.6% 16.2%
5 Hong Leong Bank 7,708 88.9 1.2% 16.6%
6 HSBC Bank 6,393 115.6 1.8% 30.4%
7 Southern Bank 6,170 36.4 0.6% 6.7%
8 OCBC Bank 5,294 68.4 1.3% 14.9%
9 Standard Chartered Bank 5,157 82.9 1.6% 25.5%
10 Citibank 4,872 81.0 1.7% 24.5%
Source: Asiaweek, 14 September2001
[http://www.asiaweek.com/asiaweek/features/financial500.2001/capsule_malaysia.html]

Each banking group, which implemented a VSS, was vetted by the Central Bank.
Besides that, a comprehensive retraining and re-skilling programme had been developed
with the cooperation of the Malaysian Institute of Bankers to facilitate a smooth transition
of the affected staffs into new areas in the financial industry and to other industries in the
economy.
According to BNM (2001), the resulting effect of the merging exercises during the
year was where 187 branches were closed, whilst 55 branches were relocated and a total
of 4,240 staff left the banking industry.
To encourage rapid merging the Government provided further fiscal incentives in
terms of exemption of stamp duty and real property gains tax for merging banks. The
Government also assisted by giving certain other tax incentives to smoothen the merger
process. One such incentive was to give tax credits for losses incurred by financial insti-
tutions involved in the merger. In this way, the anchor banks could absorb larger costs as-
sociated with the merger exercise. As much as 50% of the accumulated losses of acquired
institutions were written off tax payable.
While the Government was seen to be sacrificing income from taxes, the potential
costs of bailing out banking institutions in the future would have been even higher with-
out the merger. Indirectly, the tax breaks made acquisition price more attractive for the
acquired banks. For the acquiring banks, the total cost was lower as they utilized the
losses, incurred by the acquired bank as tax credit. For example, during negotiations be-
Managerial Finance 10

tween AMMB Holdings and Danamodal to buy MBF Finance, RM2.5 billion accumu-
lated tax losses from MBF Finance was used to offset tax on future earnings (The Edge,
28 May 2001).

The merger process presented a challenge in managing customer expectations in

Malaysia where the personal touch issue has become ever more important. Retail custom-
ers who had comfortably adjusted to the business practice in a particular branch now have
their accounts shifted to another where the personal touch was lost. Besides that, custom-
ers have been dissatisfied about the quality of the services as compared to their previous
banks.

Often the product mix had changed or standardized according to the merger plan.
This posed as a noteworthy disadvantage to customers who were accustomed to custom-
ized services and want them to continue (Tan, 2002). The risk at the corporate level has
been even more complicated, as large corporate account holders, familiarized with par-
ticular account managers were forced to rebuild their personal banking relationship with
a new face.

In many cases, clients opted to seek out another potential bank with whom they
have had prior dealings rather than having to rebuild this relationship, especially when
service levels remained weak during the transition period of the merger (Kumar, 2002).

The resulting effect was a reduction in their asset portfolios and thus on balance
sheet and income performance. Another adverse consequence of the merging process was
the fact that credit availability particularly to small-and medium-sized industries (SMIs)
was adversely affected because smaller banks were a primary source of SMIs’ credit and
these smaller banks became non-existent (Tan, 2002). SMIs particularly those in the early
starting stage often face difficulty in obtaining bank credit as they lack collateral and the
track record usually required by banks.

Mergers also caused some dissatisfaction among shareholders, for instance, when
Malayan Banking Berhad acquired the commercial and stock broking businesses of
PhileoAllied Bank Berhad (one of the small banks being taken over by bigger banks).
Avenue Assets Bhd, which had an 18.2% stake in PhileoAllied, protested against the
valuation of PhileoAllied’s assets (Philip, 2000).

One issue was where the net tangible assets (NTA) of PhileoAllied were about
1.5-2 times of profit unlike Maybank’s 1.2 times under the merger scheme. Phileo Al-
lied’s NTA per share was RM1.86 as at April 30, 2000 and this would have risen to
RM2.13 assuming all the loan stocks were converted (Philip, 2000). Another issue was
PhileoAllied shareholders were not given a share and cash option unlike other merger
schemes, for instance the merger between BHL Bank Bhd and Southern Bank Bhd
(Philip, 2000). The main thing that made the scheme unappealing to PhileoAllied was be-
cause the lack of a cash alternative by Maybank could not generate the cash required to
repay their bankers at the disposal of PhileoAllied.
Volume 30 Number 4 2003 11

Besides having to work out a fair valuation among merger partners, another issue
plaguing shareholders was the cost of integration of the information technology (IT) sys-
tems among merger partners. Integrating the IT systems and installing them took at least
a year and the cost was more than RM1 billion. These costs included a new IT system,
consultancy services and also hardware costs. There were two options adopted by the
Malaysian banks. First, anchor banks were to implement a new retail banking system and
migrated all banks within the group to the new system. For example, Public Bank and
RHB Bank took this approach and the estimated spending was RM350 million. The sec-
ond choice was to migrate to the existing anchor bank’s system. This is only feasible
when the anchor bank is relatively large, such as Maybank. No matter what choice the
banks made there were crucial factors to be considered before full implementation can be
conducted and these were not always a smooth flow.

There was a need to look at various broad issues from core banking systems that
ties everything together to retail systems such as branch networks, trading systems, back
office accounting to automated teller machines (ATMs). This was important because
again it all boiled down to customers where they needed to feel that they were dealing
with one bank and not separate banks (Chin, 2001). While banks were busy considering
such issues, it was not surprising that some customers had already shifted their business
elsewhere.

There have also been accusations that the merger programme was politically driven
and served to dilute the Chinese interest in the banking system, which rubbed many eth-
nic Chinese the wrong way. In 1999 when BNM first proposed forming six anchor banks,
eight of the 21 commercial banks controlled by the Chinese were reduced to two after the
merger (Netto, 1999). Ironically, these Chinese-owned banks were well managed and
generally healthier than the “political” banks’ with fewer bad loans. In accordance to the
original plan, six anchor banks would be generated namely, Maybank (government link);
Multi-Purpose Bank (controlled by associates of Finance Minister Daim Zainuddin); Bu-
miputra Commerce Bank (whose new shareholders would include the government as
well as businessman linked to Finance Minister Daim Zainuddin); Perwira Affin Bank
(controlled by Armed Forces Cooperative and some politically well-connected business-
man); Public Bank (controlled by entrepreneur Teh Hong Piow); and Southern Bank
(controlled by the family casino owner Lim Goh Tong) (Shameen, 1999). Almost three
months after it was first announced, the grand merger plan was abandoned and the central
bank proposed increasing the number of anchor banks to 10. It has been said that the sud-
den change of mind was because Prime Minister Dr. Mahathir was facing an intense elec-
tion and needed Chinese votes to return to power. BNM however denied the allegations
(Singapore Strait Times, 23 August 1999).

Implications for the Future

It may be too soon to comprehend or evaluate the full impact of the bank merger program
in Malaysia. However, a number of observations had become quite clear. With effect
from 14 April 2000, banking institutions were given blanket approval by Bank Negara
Malaysia to outsource non-core functions to third party resident service providers (Table
5). This means that financial institutions are becoming more specialized in specific prod-
uct markets.
Managerial Finance 12

Table 5: Outsourcing of ICT Related Functions

Outsourced Functions No. of Banking Institutions
Posting of statements 6
Office Automation maintenance 4
Data Centre operations* 4
System maintenance 3
Network operations 3
Data Centre infrastructure 1
Disaster Recovery for RENTAS 1
Branch hardware 1
ATM Cash management 1
E-HRMS 1
Microfiche 1
Web-site 1
E-mail operations 2
* Data center operations are foreign banks regional centers or domestic banks subsidiary company.
Source: BNM Seminar 10 October 2001

Consequently, instead of a growth in the number of universal banks, firm speciali-

zation is occurring. Specialization is supposed to cut costs and raise productivity as well
as efficiencies. Also the larger and a stronger capital base of domestic banking groups
have strengthened the resilience of these institutions. In general banks also face a clash in
business culture as reflected by the lack of cross selling of products when there was a
merger of retail-oriented and corporate banking-oriented banks.

The merger process may affect the syndicated loan activities of banks. In the past,
borrowers from the infrastructure related sectors dominated the Ringgit syndicated loan
market. Major borrowers within this sector were independent power producers and toll
road concessionaires which required long-term financing for their projects. These project
financing related loans were inclined to be fairly large in terms of size. Coupled with the
strong credit appetite from banks before the Asian crisis, the syndicated loan market grew
to its peak in 1997, with an outstanding amount of RM22.88 billion (US$6 billion). As of
March 2001, outstanding ringgit syndicated loans stood at RM18.3 billion against the to-
tal loans in the banking system of RM471.3 billion (Chew, 2001).

A merged bank can lead to a stronger competitor but it also means the number of
banks willing to hold part of a loan reduces accordingly. With the lessons from the Asian
crisis, banks have become more prudent in their lending. Banks have been more cautious
and selective in their choice of credits although there was surplus liquidity in the banking
system.

These factors, together with pressure to meet the minimum 8% per annum loan
growth quota set by BNM, meant that most ringgit term borrowings were restricted to
good credit names (Chew, 2001). In addition, although capital and single customer limits
Volume 30 Number 4 2003 13

of banks have increased, participation from banks in the loan market has been dependant
on relationships.

Banking analysts believe it will only be a matter of time before banks are forced to
merge again. This time mergers and acquisitions will be driven by market forces rather
than by the central bank exerting the force (Kumar, 2002). There are still too many bank-
ing groups and thus Malaysia is still far behind the pace set by Singapore (Taing, 2001).
Given the increasing capital requirements and the eventual liberalization of the sector, it
is only logical that banks will merge possibly with locally incorporated foreign banks.

Conclusion

Merger has been described by the Central Bank to be a necessary pre-condition to create
strong, efficient and competitive banking systems. However, the merging programme
supplemented with other measures, as merging on its own cannot achieve these objec-
tives. BNM, therefore, continues to introduce appropriate policies such as enhancing the
expertise and professionalism of the banking personnel and bringing about more effective
corporate governance to further increase the resilience and competitiveness of the bank-
ing institutions in the context of the challenges of a globalized and liberalized environ-
ment.

The merger program is the first important step in this mission. Due to savings on
manpower, information system and reduction in branch networks, banking services are
said to be made available to the nation at a lower cost. The merged banking groups have
now focused their attention towards ensuring a smooth transition in the integration pro-
cess of their businesses. Efforts would continue to be channeled towards strengthening
the core groups of banking institutions to become more significant players in the domes-
tic market.
 Appendix 1: Merger Program Details
Acquirer Acquired Vendor Date Stake Value SSB comments on transaction details
(%) (RM Mils.) and rationale
Maybank Phileo Allied Bank & Phileo Allied 30 Aug 00 100.0 1,300.0 Phileo was acquired at 1.3x book value
Phileo Allied Securities and Pacific at 1.8x book value
The Pacific Bank The Pacific Bank 24 Aug 00 100.0 1,250.0 Even without the two banks, Maybank's
lead position would have still be intact
Managerial Finance

Sime Finance Sime Bank 29 Oct 99 100.0 79.6 Pacific gives exposure to the Chinese SMI
segment and Phileo provides equity sales
expertise
Commerce-Asset Bumiputera-Commerce MOF; Khazanah 22 Jun 99 100.0 1,464.3 Merger created the 2nd largest domestic
Holding bank with the infrastructure to compete
with Maybank
RHB Capital Delta Finance Various 30 Jun 00 100.0 273.8 Bank Negara directive to merge. Delta
was acquired at 1.9x book value
Interfinance Various 30 Jun 00 90.0 69.3 1.4x book value. Both are small and have
little impact in terms of integ risks
Public Bank Hock Hua Bank Various 22 Dec 00 100.0 1,249.0 Hock Hua Bank was acquired at 1.4x book
value. Friendly merger
Advance Finance Various 30 Jun 00 100.0 67.2 Advance was acquired at 1.7x book value
Sime Merchant Bankers Various 29 Aug 00 100.0 0.0 Sime Merchant was acquired for RM5 and
provides the group with a merchant bank
license
Hong Leong Bank Wah Tat Bank Various 30 Jun 00 100.0 210.0 Impact from Wah Tat acquisition is small
as it accounts for c. 3% of HL Bank assets
Credit Corporation Gadek Capital 30 Jun 00 100.0 470.0 CCM complements Hong Leong Finance's
Malaysia niche in car financing
Affin Holdings BSN Commercial Bank BSN 30 Aug 00 100.0 338.6 Acquired at 1.6x book value. Post
acquisition, BSN Commercial's asset
quality has deteriorated
BSN Merchant Bank BSN 30 Aug 00 100.0 32.9 Acquisition price based on adjusted NTA
computed on Dec 99 NTA of RM5.3m
14
 Appendix 1: Merger Program Details
Acquirer Acquired Vendor Date Stake Value SSB comments on transaction details
(%) (RM Mils.) and rationale
BSN Finance BSN 30 Aug 00 100.0 85.7
Alliance Bank International Bank Various 17 Nov 00 100.0 283.5 IBM was acquired at 2.1x adjusted book
Malaysia value of RM132.3m as at 31 December
1999
Sabah Bank Various 30 Aug 00 100.0 255.6 Sabah Bank was acquired at 1.4x adjusted
book of RM182.6m as at 31 1999
Volume 30 Number 4 2003

Bolton Finance Various 30 Aug 00 100.0 130.0 Acquisition price based on adjusted NTA
as at 30 June 1999 of RM77.8m 1.7x book
value
Sabah Finance Various 17 Nov 00 100.0 1.6 Sabah Finance had an audited net deficit
of RM33.9m as at 31 December 1999
Bumiputera Merchant Khazanah; NM 14 Aug 00 100.0 43.9 Acquisition price based on adjusted NTA
Bank as at 31 December 1999 of Rothschild
RM109.8m, or 1.3x book
Amanah Merchant Bank Amanah 14 Aug 00 100.0 230.0 Acquisition price based on adjusted NTA
as at 31 December 1999 of Merchant
Hold. RM146m, or 1.6x book value
Southern Bank Ban Hin Lee Bank Various 27 Apr 00 100.0 1,079.3 Ban Hin Lee was acquired at 1.9x book
value
Cempaka Finance Various 30 Aug 00 100.0 5.0
United Merchant Finance Various 6 Jan 00 100.0 319.4 Acquired at 1.2x book value
Perdana Finance P. Merchant; K. 27 Jun 00 100.0 23.0 Acquired at 1.2x book value Pegawai
Perdana Merchant Bankers United Merchant 28 Jun 00 50.1 8.0 Acquired at 1.5x book value
Group
EON Bank Oriental Bank Various 30 Jun 00 100.0 0.0 Purchased for RM1, had net tangible
liabilties of RM357m as at 31 March 2000
15
 Appendix 1: Merger Program Details
Acquirer Acquired Vendor Date Stake Value SSB comments on transaction details
(%) (RM Mils.) and rationale
MIMB Various 30 Jun 00 100.0 373.0 Acquired at 2.3x book value
City Finance Various 30 June 00 100.0 80.0 Acquired at 2.6x book value
Perkasa Finance Various 30 Aug 00 100.0 19.0 Acquired at 1.4x book value
Managerial Finance

Arab-Malaysia MBF Finance Danamodal 3 Aug 01 100.0 925.0 Payment comprises RM475m cash and a
Finance continget amount of RM450 from
recoveries. MBF Finance has S/H funds of
RM14.5m as at 30 June 2001.
At RM450m plus tax credit suggest
acquisition cost of c.1.0x book value but
@ RM925m, AMF could be paying 2.2x
book value
Total 10,766.7
Source: Salmon Smith Barney Inc.p 7and 8.
16
Volume 30 Number 4 2003 17

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