What led to the collapse of AmBank-RHB deal?

ON the surface, the proposed merger between RHB Bank Bhd and AMMB Holdings Bhd (AmBank) seemed like a promising deal.

It had the blessings of the central bank, and the enlarged entity would have emerged as the leading bank in asset management, general insurance and equities broking, and taken second place in Islamic banking.

Admittedly, there were several hints of uneasiness surrounding the deal, as reflected in the decline in the share prices of both banks since the announcement of the planned merger in June.

So, when the deal was called off earlier this week, it naturally raised questions as to what exactly was the straw that broke the camel’s back.

From the operations point of view, there were already indications that the market was uncomfortable with the deal, which is hardly surprising, given the magnitude of the potential layoffs that would have taken place.

It was estimated that thousands would have lost their jobs if the merger had gone through, particularly on the AmBank side, being the takeover target.

It is also known that AmBank has a high cost-to-income (CTI) ratio, which stood at 56.3% as at June 30, 2017, and RHB would have had to inherit this.

According to AmBank’s latest financial results, the current CTI ratio remains unchanged from a year ago.

RHB, on the other hand, has seen its CTI ratio improving to 48.9% as at March 31, 2017, and the bank aspires to keep the ratio at less than 50%.

When AmBank Group chief executive officer Datuk Sulaiman Mohd Tahir came on board in November 2015, there were several other key appointments made to the management of the group.

At that point, it was said that the management had not really been given a heads-up about the plans for the merger.

Initial talks about the potential merger were apparently held between Tan Sri Azman Hashim, AmBank’s second-largest shareholder with a 13% stake, and RHB chairman Tan Sri Azlan Zainol.

The two influential personalities were the drivers of the planned deal, although sources say that the biggest push had come from Bank Negara.

At first, the Employees Provident Fund (EPF) was all for the deal, and the management of RHB was also seen as supportive of the move.

This makes sense, as the deal would have fortified RHB’s position in the industry, making it bigger, stronger and instant market leaders in several areas.

However, there were other factors that soon came into play.

Some RHB board members raised concerns about the potential contingent liabilities that AmBank could face from its dealings with 1Malaysia Development Bhd (1MDB).

Sources say the board then decided to take some precautions by seeking legal counsel, and sought the advice of a local law firm about the possible implications.

It decided to also seek advice from a US-based law firm, given that there were investigations carried out by the US Department of Justice (DoJ) in relation to 1MDB.

At this point, the EPF became slightly nervous about the deal.

The fund then decided to recuse itself from the decision-making, leaving it entirely in the hands of the independent directors.

The deliberations revolved around the risks of these potential contingent liabilities, and how this issue would continue to hang over the bank until the case is completely resolved.

RHB then came to its decision. AmBank, however, refutes claims that the failure of the deal was linked to concerns about the potential contingent liabilities.

The group tells StarBizWeek that as reflected in its audited results on March 31, 2017, it does not have any material litigation which could materially affect its financial position.

“AmBank’s contingent liabilities remain at a normal rate based on business requirements.

“Our contingent liabilities include direct substitutes, transaction-related contingent items, obligations under underwriting agreements and short-term, self-liquidating, trade-related contingencies.

“As such, to attribute the end of AmBank’s merger discussions with RHB Group to contingent liabilities would indeed be inaccurate,” it says.

According to sources, AmBank’s own reservations about the proposed merger was related to RHB’s valuations, which they felt was on the high side.

This was due to RHB’s exposure to oil and gas (O&G) assets.

AmBank’s exposure to O&G assets, meanwhile, is under 2% of its total gross loans.

The proposed merger was first announced in June and called off in August – all in under three months.

Sources say this means that the banks may not have even gotten to the stage of conducting due diligence before the entire plan crumbled.

While Aabar Investments PJS, which holds 17.75% in RHB, has been viewed as a stumbling block in previous attempts by the bank to enter merger deals, this does not seem to be the case this time around.

The Middle Eastern entity was reportedly among the major factors in the failure of the proposed three-way mega-merger involving CIMB Group Holdings Bhd and Malaysia Building Society Bhd in 2015, as it was seen as wanting a higher price for its shares in RHB.

This time, however, the shareholder was not seen as a factor in the calling off of the AmBankRHB deal.

On the other hand, Australia and New Zealand Banking Group Ltd (ANZ), one of AmBank’s major shareholders apart from Azman, is among the parties that truly wanted the deal to go through.

ANZ has been looking to exit AmBank by selling its 23.8% stake, which would have been reduced to 10.5% in the merged entity, to Retirement Fund Inc (KWAP).

With the merger called off, however, KWAP is no longer keen on pursuing talks.

It looks as though ANZ may be forced to keep its stake in AmBank, estimated to be worth RM3.4bil, for some time more.

With such a huge stake, finding a buyer is difficult enough, but the sale would also have to get

the approval of Bank Negara, which has several restrictions on the ownership of large stakes in banking groups.

In essence, the deal is likely to have failed because there was only one major driver pushing for it to go through – the central bank.

The two banks themselves seemed to be more cautious and wary about the implications of the deal, and ultimately decided not to go ahead with it.

It is also only natural that the EPF would err on the side of caution, seeing that it carries the responsibility of dealing with public funds.

Following the abortion of the AmBank-RHB merger, AmBank released its first-quarter results for financial year 2018 on Thursday, while RHB is set to release its own results next week.

AmBank posted a firmer set of financial results, with profitability and revenue slightly higher for the quarter.

It is also interesting to note that RHB shares have moved up by about 4%, while AmBank is down by close to 5%.

Analysts seem to be more positive on RHB, compared to its smaller rival, following the collapse of the deal.

While AmBank will always be seen as a merger and acquisition play, it looks as though both banks will have to move forward and grow on their own for now.

If there is a lesson to be learnt from this, it is that mergers have to be market-driven, and that if both sides are unable to meet halfway or find a middle ground, then it will not work out.

Such mega-deals must also have a strong personality in the driver’s seat – the push from the central bank alone is not enough.

While Azman and Azlan are both influential personalities, a leaf can be taken from the book of Tan Sri Rashid Hussain who had helmed what became RHB today.

The veteran banker was instrumental in the creation of RHB Capital, which was the result of a merger between Kwong Yik Bank Bhd, DCB Bank Bhd, Sime Bank Bhd and Utama Banking Group, back in the 1990s.

In the case of RHB and AmBank, a strong driver seemed to be lacking in this exercise.