[KUALA LUMPUR] Malaysian lenders are rolling out alternative growth strategies for their Islamic businesses, after a proposed three-way merger that would have created one of the world's largest Islamic banks was scrapped last month.
Weak economic conditions scuppered plans for a tie-up of Malaysia's second-biggest lender CIMB Group Holdings Bhd with RHB Capital Bhd and Malaysia Building Society Bhd (MBSB).
It would have created Southeast Asia's fourth-largest bank with assets of US$190 billion.
Those plans called for combining their Islamic businesses into a so-called mega Islamic bank, a concept which Malaysia had been promoting as a way to give the lenders a regional footprint and the ability to compete for bigger deals.
MBSB, a non-bank lender and the smallest of the three firms, is now studying a plan to convert itself into a full-fledged Islamic lender.
It said last week it would convert existing conventional financial products into Islamic ones while introducing new ones to close the gap with competitors. It aims to double its corporate loan book by 2020.
"Our aspiration is to take the institution to go fully Islamic. Basically, we are looking at two to three years for this project," said a person with direct knowledge of the lender's plan, who declined to be identified because he is not authorised to talk to the media.
MBSB declined to comment.
Both CIMB and RHB Capital have established, domestically focused, Islamic units.
Attention might shift inwards for the parent banks: CIMB, Malaysia's second-largest lender, has said it is reviewing its operations in the Asia-Pacific region, aiming to cut costs in its investment banking business by a third.
But growth in Islamic finance is outpacing that of conventional banking, giving their Islamic units more leeway to expand.
RHB has said it hopes to double it sharia financing assets to 30 per cent of the total by 2017 and is exploring increasing its range of Islamic finance products.
CIMB Islamic, the Islamic arm of CIMB, is seeking to develop new sharia-compliant products and is open to acquisitions, chief executive Badlisyah Abdul Ghani said in an interview. "If there's something in terms of M&A opportunities that come along, it's our responsibility to have a look," he said.
CIMB, RHB and MBSB announced on Jan 14 that they had scrapped plans to merge as a drop in the price of CIMB stock had complicated a proposed share swap deal with RHB Capital.
RHB Capital had sought an improved share swap ratio, and possibly cash, people familiar with the merger negotiations said. RHB Capital did not respond to requests for comment.
Future transactions could focus on buying smaller peers on a cash basis to improve the likelihood of success, some analysts said. "I wouldn't discount any M&A if it's a fairly big bank taking over a smaller bank. CIMB and RHB are both sizable and it gets challenging," said David Ng, chief investment officer at Affin Hwang Capital Asset Management.
Gerald Ambrose, chief executive at Aberdeen Islamic Asset Management Sdn Bhd, said there might still be appetite in Malaysia for a large Islamic bank. But market conditions and the simplicity of the deal would be key to its potential success. "It's a lot more difficult with the economic outlook. It might be more difficult to lay off staff to get synergies, but it's not impossible if both sides are willing," Mr Ambrose said. "It has to happen quite quickly, the more you leave it, the more share prices move around, the more dissatisfaction happens in one party against the other."