Merger plans set to transform Malaysian banking sector

Plans by three of Malaysia’s biggest lenders to merge into the country’s largest bank conglomerate have thrown a spotlight on the health of the industry.

CIMB Group last week revealed plans to buy smaller rivals RHB Capital and the Malaysia Building Society, a plan that would create a group with total assets of RM 614bn ($192.8bn) and a 23% market share of domestic loans. This would eclipse the current market leader Maybank’s worth of about RM 578bn ($181.49bn) and market share of 18%.

The three confirmed on July 2 that they had obtained approval from Malaysia’s Central Bank or Bank Negara Malaysia for the deal and have since entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure, and other relevant terms and conditions. The banks say part of the aim is to create a ‘mega Islamic bank’ by tapping in to the country’s status as one of the world’s leading Islamic finance centres.

“Bank Negara has long been talking about creating regional [banking] champions. Given that the Malaysian banking industry has reached a challenging level in terms of organic growth, size does matter,” Sue Lin Lim, an analyst at AllianceDBS, told London’s Financial Times.

Slow start

The deal may also give the domestic banking sector a boost amid criticism that growth has been stale this year. Bank Negara this month revealed that loan growth had slowed to 9.7% year-on-year (y-o-y) in May from 10% y-o-y in April, due mainly to a slowdown in business loan growth.

“Suddenly an industry faced with dull growth prospects amid growing competition is abuzz again,” wrote the Edge magazine in an editorial. “This will be the largest banking merger in a very long time and which could potentially change the current landscape.”

Although mainly related to business growth loan, the decline in May follows central bank measures last July that saw the maximum tenure for personal loans reduced to 10 years, home loans restricted to no more than 35 years, and prohibiting offers for pre-approved personal loans.

An RHB Research survey in July saw the agency downgrade its rating on Malaysian banks to “neutral” from “overweight”.

“A consistent message that came out of our recent meetings with banks was that business lending has been subdued, while capital markets remain quiet,” RHB Research analyst David Chong noted in his report.

The loan decline contrasts with rosy predictions made by the World Bank last December. Touting Malaysia as a success story in terms of financial inclusion and quality of banking regulations and supervision, the bank said the sector was poised for further growth this year.

Regional aspirations

Despite global fluctuations in the economy caused by higher US interest rates, Malaysia’s banks recorded 17% profit growth overall in 2013. The World Bank forecast opportunities for the expansion of banks, both in the domestic and regional marketplaces.

It is the latter market that the new group is expected to target, with some considering the deal a statement of intent as ASEAN deepens its financial integration. A table of top 10 banks’ pretax profits in ASEAN compiled by The Banker shows Maybank in fourth place behind Singapore’s OCBC, DBS and United Overseas Bank.

“The next big thing for Malaysian banks is to venture abroad, and with this merger, it could be a game changer for CIMB in the ASEAN region,” an analyst who wished to remain anonymous told Malay Mail.

However those in the market had expected the push towards Islamic banking to come from BIMB Holdings, a holding company for various sharia-compliant businesses in Islamic banking, insurance and stockbroking. The combined assets of the three banks will still rank second after Maybank in terms of Islamic banking assets, Lim pointed out.

Integration hurdles

But before the new conglomerate can start targeting Southeast Asia, it will first need to navigate the complex three-way merger process and address challenging integration issues.

For instance, critics have noted overlap between CIMB and RHB in investment banking services and retail services. A similar deal touted in 2011 was likely scrapped because it was felt the companies offerings would blur. Because the prospective merger’s branch total would equal 550, compared to Maybank’s 399, it seems likely that the new grouping would face a potentially painful period of consolidation.

“The ability to extract these cost synergies may be a hurdle in the near term as it would largely depend on rationalising branches and staff, which could be politically unpalatable,” said ratings agency Fitch in an analysis of the proposed merger.

Although analysts differ on the logic behind the merger, most agree that it signifies a new dawn for the banking sector where size will matter more than before as lenders look to compete on a regional level.

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Merger plans set to transform Malaysian banking sector

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Malaysia: The year of LTE telecoms

Following the launch of Malaysia’s first long-term evolution (LTE) mobile telephone network in January, this year should see a rush to market as major operators look to expand their data earnings. The rollout of new technologies and products offered by telecoms firms in Malaysia is in line with growth in the region, which has ambitions to become a global leader in mobile broadband access.

Mobile data traffic in Malaysia should double this year, following the global trend, according to a recent report by telecoms equipment firm Ericsson. The company said it expected mobile data volumes to rise by a compound annual growth rate of around 50% between 2012 and 2018, with video a major contributor to the increase. Growing data volumes, which generate higher earnings than voice traffic, should help bolster operators’ earnings at a time when the voice market is not far from saturation.

Todd Ashton, Ericsson’s new president for Malaysia and Sri Lanka, said this implied twelve-fold growth in the 2012-18 period. Malaysians are increasingly using mobile data services as smartphones become more widespread. The roll-out of LTE networks, which is to an extent fourth-generation (4G) mobile technology, should provide greater capacity for the rapidly growing data volumes.

In January, Maxis, the mobile market leader by subscriptions, announced the launch of Malaysia’s first LTE network, focusing on parts of the Klang Valley, the region around Kuala Lumpur where more than one-fifth of Malaysia’s population lives. Maxis says that speeds average 10-30 megabits per second (Mbps) and reach up to 75 Mbps.

The company also offers LTE-compatible USB internet through dongles and is strongly targeting the handset market, offering subscribers LTE mobile telephones to encourage them to access high-speed services. “As more and more LTE devices come into the market, the coverage and expansion will have to be matched,” Sandip Das, CEO of Maxis, said at a press conference in late March.

Maxis is planning to expand its LTE coverage to several major metropolitan areas by the end of the second or third quarter of 2013. Das said that LTE rollout was currently limited due to the requirement that it use fibre-supported networks. The telecoms firm also expects revenue growth to rise this year, partly thanks to growing data business. In 2012 the company’s revenue grew 1.9% to RM8.97bn ($2.95bn) from RM8.8bn ($2.89bn) in 2011, in part due to higher revenue from its corporate business across the board.

Several other operators are set to swiftly follow Maxis’ adoption of LTE technology. In March Celcom Axiata, Malaysia’s second-largest mobile operator by subscriptions, announced that it would be allocating RM100m ($32.9m) in capital expenditure to roll out LTE, with commercial launch of the high-speed network due to be announced in the second quarter of this year.

Ole Martin Gunhildsbu, the chief technology officer at DiGi, Malaysia’s third-largest mobile operator by market capitalisation, said in March that the company would complete its network modernisation by the end of the year, allowing its customers to be able to enjoy “wireless fibre-like speeds” on LTE-compatible devices. DiGi started the upgrade in 2011, and dedicated a substantial part of its RM700m ($230.5m) capital expenditure in 2012 to the process. DiGi is deploying a single radio access network, which provides multi-spectrum data access on 2G, 3G and LTE. Local press reports suggest the introduction of this technology could lower costs per user.

The planned launches this year make Malaysia one of the leaders in the Asia-Pacific region in LTE rollout, along with Singapore and the Philippines. Ericsson’s Ashton said that he expected LTE coverage in the region to overtake the global average in 2017, reaching 60% against 50% internationally, and could account for around two-thirds of the world’s LTE population coverage.

He added that Malaysia’s high demand for broadband through other media – fibre-to-the-home has take-up of nearly 40% and household broadband penetration tops 65% – bodes well for the growth of the LTE market. “As broadband goes mobile, Malaysians will expect good coverage, with higher speeds and better quality of service, which is what our LTE technology will enable,” Ashton said.

The launch of LTE networks is the latest stage in the evolution of Malaysia’s telecoms market. While rollout will be incremental at first, it is likely to pick up as more competitors join the market and investments in capacity are completed. Indeed, as the country moves toward high-income status, the opportunities for capitalising on strong demand for broadband will continue to grow.

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Malaysia: Targeting tourism growth

The hospitality sector, one of the region’s largest, is continuing to see visitor numbers grow this year, boosted by better transport connectivity with large emerging markets. This development is increasingly being linked with Malaysia’s overarching strategy of raising revenues and value in key economic sectors, a theme that is set to dominate the next few years.

According to Ng Yen Yen, the minister of tourism, Malaysia registered 11.63m arrivals in the first half of 2012, up 2.4% over the same period in 2011. Receipts grew more rapidly, increasing 4% over the same period to RM26.8bn ($8.81bn). Ng attributed the continuing rise in visitor numbers in part to improved connectivity (particularly with China) and events such as the F1 Malaysian Grand Prix and the Citrawarna cultural festival.

Other members of ASEAN accounted for around 73.8% of arrivals. Singapore, which has close cultural, economic and social ties to its northern neighbour, remained by far the biggest source of visitors, with 5.83m arrivals in the first half of this year. This number is likely to have been somewhat boosted by shuttle traders, who pass over the border on a regular basis, and day-trippers.

The other largest contributing countries were: Indonesia, with 1.11m arrivals; China (758,000); Thailand (639,000); Brunei Darussalam (588,000); India (365,000); Australia (243,000); the Philippines (238,000); Japan (216,000); and the UK (197,000). Arrivals from China were up 34.2% on the first half of 2011, India (6.9%) and Russia (28.2%). There was also impressive growth from established markets, including France (20.6%); the US (18.9%); South Korea (18%); Japan (32.5%); and the UK (5.9%).

Analysis of the figures by Tourism Malaysia, the official promotion and development agency under the Ministry of Tourism, indicates the importance of enhancing air connectivity in stimulating this growth. The organisation partly attributes the rise in arrivals from China to an increasing number of flights between Beijing and Kuala Lumpur, and Hong Kong and Penang and Kota Kinabalu, two major regional tourism centres.

Similarly, the increase in Japanese and Korean visitors is partly due to more flights between provincial cities in those countries and Kuala Lumpur and Kota Kinabalu. By the same token, Tourism Malaysia attributes declining visitor numbers from New Zealand, Australia and South Africa to fewer flights being operated. Meanwhile, Vijay K Gokhale, India’s high commissioner to Malaysia, said that if AirAsia restored flights to Delhi and Mumbai, which were suspended in March, Indian visitors to the South-east Asian market could rise to 1m annually by 2015 from around 693,000 in 2011.

With the importance of connectivity and tapping expanding markets in mind, the tourism authorities are continuing to work with Malaysian Airlines and AirAsia, the country’s two main carriers, to develop links internationally, and will continue to seek bilateral agreements with countries such as Russia to increase visitor traffic.

However, increasing visitor volumes is not the only priority. Indeed, over the coming years, this strategy seems likely to become less important than efforts to boost value and diversification. Malaysia’s Economic Transformation Programme (ETP), the government’s overarching strategy to push Malaysia towards developed-country status by 2020, notes that the country is a “high arrivals, low yield” tourism market.

The aim is to keep visitor numbers rising while building considerably greater value in the sector to increase earnings per tourist arrival. Tourism has been identified as a National Key Economic Area (NKEA) under the ETP, with the goal of attracting 36m visitors and generating RM168bn ($55.26bn) in tourism receipts by 2020.

In practical terms, this means focusing on high-value niche segments. The ETP has identified five such segments: luxury; nature adventure; family; events, entertainment, spa and sports; and business tourism. To develop these niche areas, a number of existing segments will need to be promoted, such as ecotourism and meetings, incentives, conventions and exhibitions (MICE). Malaysia will also need to be rebranded to well-heeled visitors as a “luxury” destination, leveraging the increasing number of top-end hotels, resorts and shopping malls.

Malaysia is in the fortunate position that it already has existing business in these high-value areas, as well as a strong international brand as a destination. But to meet the ETP’s targets, considerable investment will be needed, particularly from the private sector, in keeping with the plan’s priorities.

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Malaysia: Airline alliance

The forthcoming entry of Malaysia’s largest airline into the oneworld alliance, a group of the world’s major airlines, plus efforts among airlines to boost connectivity in Asia and invest in capacity to support long-term growth, are set to increase flight frequency and services.

Duncan Bureau, the senior vice-president of global sales and distribution at Malaysia Airlines (MAS), the country’s flag carrier, said recently that the airline is making progress toward its planned membership in the oneworld airline alliance, which is expected to be completed in early 2013. MAS is forming bilateral agreements on code shares with a number of oneworld carriers, most recently Cathay Pacific and Royal Jordanian.

To prepare, the airline has made a number of recent investments in newer, more fuel-efficient aircraft, which is expected to reduce its long-term costs, particularly on fuel. In August, MAS took delivery of its second Airbus A380. The new aircraft will allow MAS to increase its A380 service between Kuala Lumpur and London from the current three times a week to every day. A third A380 should be commissioned by the end of November, which will fly daily between Kuala Lumpur and Sydney. Also in August, MAS received its 75th delivery of a Boeing 737, with a “next-generation” 737-800.

The airline also aims to increase passenger loads on its routes to India by 15% in 2012, the international press reported in mid-August. MAS flies a total of 40 weekly flights to five cities in India from Kuala Lumpur. The airline is planning to increase frequencies to Mumbai (Bombay), Chennai (Madras) and Bengaluru (Bangalore) from September 1 to strengthen connectivity and provide more options for passengers on these routes.

MAS is targeting a return to profitability next year as efforts to strengthen its financial position seem to be paying off. The airline cut its losses in the second quarter of 2012 to RM348.7m ($112.44m), from RM525.8m ($169.55m) in the first quarter. It has been particularly successful in tackling fuel costs (which accounted for 37% of expenses in the period), reducing them by 18%. The airline said that foreign exchange losses of RM173m ($55.79m) contributed to its losses.

“The group’s aggressive focus to consolidate our network is helping the turnaround, as already showing in the improvement in yield and lower operating expenses, specifically spending on fuel,” said Ahmad Jauhari Yahya, the CEO of MAS.

The industry is also seeing increasing expansion via MAS’s budget rival, AirAsia. The airline, headquartered in Kuala Lumpur but with subsidiaries in Indonesia and Thailand, continues to grow. In July, it announced the purchase of Indonesia’s Batavia Air for $80m, its first major acquisition and a foray into the fast-growing Indonesian market.

The same month, AirAsia X, the carrier’s long-haul division, announced that it aimed to double flights to Australia from Kuala Lumpur, as it increases its fleet of twin-aisle Airbus A330s to 25 from the current 11. This will see the airline compete with MAS on Australian routes, as well as with Singapore Airlines’ new budget line Scoot and Jetstar, the low-cost subsidiary of Australia’s Qantas.

Earlier this year, AirAsia pulled out of a share swap deal with MAS, citing the latter’s problems with management and labour unions. The deal was intended to ease the rivalry between the two carriers, and lead to a degree of route consolidation, loosening the squeeze on profitability. While the agreement fell through, some feel the groundwork for greater cooperation has now been laid.

The suspended talks notwithstanding, Malaysia’s air transport segment is on the cusp of imminent expansion as a result of MAS’s entry into oneworld and increasing flight frequencies between Kuala Lumpur and other regional capitals.

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Malaysia: Ties that bind

The recent strengthening of bilateral ties between Malaysia and Singapore bodes well for their construction sectors, as several planned projects between the two countries should bring lucrative business opportunities to both. A foreseen labour shortage in Malaysia, however, could stymie some projects’ development.

The construction and services sectors are expected to be the Malaysian economy’s main growth drivers in 2012 amid a forecasted drop in exports due to the difficult global economic environment. The government has targeted growth of 7% for the construction sector in 2012.

“Thus, construction projects will be a key economic stimulus due to their multiplier effect,” said Kwan Foh Kwai, the president of the Master Builders Association Malaysia (MBAM), when speaking with local media outlets at the end of December.

On January 5, the leaders of Malaysia and Singapore announced plans to boost transport links between the two nations, with a road tunnel and water taxi service the first of many projects.

Plans are already under way for joint operations to begin building projects worth $9.8bn and a mass-transit railway system linking Malaysia’s southern Johor state and Singapore that could begin operations by 2018. The leaders said they are also now looking to partner in areas such as aviation, with Malaysia’s Senai International Airport potentially cooperating with Singapore’s Changi Airport.

“There are many more areas for potential cooperation,” Malaysian Prime Minister Najib Razak told reporters in early January after talks with Singaporean Prime Minister Lee Hsien Loong. “All the current agreements that both countries have managed to reach will pave the way for stronger bilateral ties.”

The agreement was widely seen as symbolic of continued improvements in relations between the two neighbours, which between 1963 and 1965 formed one nation. Relations improved in 2011 when a decades-old land usage dispute was resolved, which saw Malaysia agree to relocate its railway station away from Singapore’s central business district.

Both governments appear to be eager to continue the process. “There should be more new initiatives taken between both countries,” the Singaporean prime minister told local reporters.

Examples of these new initiatives are many. Last year, Khazanah Nasional and Temasek Holdings, the state-owned investment companies of Malaysia and Singapore, respectively, announced plans to cooperate on property projects, including $8.67bn of retail and residential developments in Singapore’s downtown area. These developments will incorporate the former site of Malaysia’s train station.

The two investment firms also plan to jointly construct RM3bn ($968.73m) of projects in Malaysia’s southern Iskandar economic development zone region that will include retail and residential offerings. Located adjacent to Singapore, at the apex of Malaysia’s East Coast Economic Corridor (ECER), Iskandar is a territory of around 2217 sq km.

“The development of Iskandar and its success is very important for Singapore as it will benefit both sides in many ways,” said the Malaysian prime minister.

The planned railway linking southern Johor state and Singapore will make Johor Baru City — long the entry point for many visitors to Malaysia from neighbouring Singapore — something of a satellite city for Singaporeans, who are keen to take advantage of Iskandar’s much lower cost of living.

However, there has recently been a shortage of foreign labour in Malaysia, causing some to question how all these projects will get built – and causing some sector leaders to call for immigration changes to address this issue.

Foreseeing such an industry-wide labour shortage on the horizon, the MBAM appealed on January 20 to the Home Ministry to lift a temporary suspension of workers’ quota applications.

MBAM’s Kwan said the ministry has not allocated a new foreign workers’ quota, which means contractors have been unable to secure enough workers for their projects.

“The construction industry is facing a severe shortage of manpower resources as too many construction companies in Malaysia are competing for a limited supply of talent,” Kwan said in a statement. He added that the shortage of foreign workers could undermine the many construction projects planned under the 10th Malaysia Plan and the Economic Transformation Programme.

“We face a shortage in terms of volume and quality of skilled workers, technicians and supervisors,” said Kwan, adding that he hopes the government will relax the policy involving the entry of new foreign construction workers.

With the bulk of the country’s economic performance for the year hanging in the balance, the Home Office will likely be under increasing pressure to act quickly on the quota issue. However, with elections widely expected in March, the hot-button issue may well be one that is not easily solved. Meanwhile, builders and investors on both sides of the Straits of Johor will no doubt be eager to break ground on the many contracts that have now been signed.

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Malaysia: Ties that bind

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