MIDF targets the big league

Merger with Al Rajhi will give it access to Islamic universal banking

MALAYSIAN Industrial Development Finance Bhd (MIDF) is finally making its way to become a full-fledged bank.

Late Wednesday, MIDF and Al Rajhi Banking & Investment Corp (M) Bhd submitted to Bank Negara their proposal to merge.

This came about after more than nine months of discussions including two extensions given by the central bank.

Quoting sources, Starbiz reported yesterday that the merger would be completed by year-end.

Significantly, Permodalan Nasional Bhd (PNB), which is the owner of MIDF, will end up with a majority stake of over 60% in the merged entity, which would become a fullfledged Islamic bank.

There are 16 Islamic banks and 26 commercial banks in the country.

This raises the question of whether PNB would be allowed to own majority stakes in two banks in the country.

PNB is also the single largest shareholder of the country’s biggest bank namely Malayan Banking Bhd (Maybank) with a 48.3% stake.

A market observer says it is possible that PNB would be allowed to be the major owner of the two banks if it is seen that the two institutions operate in different areas –Maybank being a commercial bank while the new merged entity operating as an Islamic bank.

Then there is the possibility of PNB opting to reduce its stake in the new MIDF-AL Rajhi merged entity. This could take the form of a public listing of the latter.

As such, a potential initial public offering of the soon-to-be-merged entity could be on the cards in the coming years.

In the past few years, there have been talk of mergers among local banks, partly to address large shareholdings of entities in banks, to fulfill the requirements that are set out in the Financial Services Act 2013.

The mega-merger proposal between CIMB, RHB and Malaysia Building Society Bhd (MBSB) in 2014 was aimed at resolving the large shareholding that the Employees Provident Fund (EPF) has in these banks. EPF owns 40% of RHB and 60% of MBSB. The EPF also has more than 14% in CIMB.

The deal fell through but MBSB managed to merge with Asian Finance Bank Bhd (AFB) in 2018. Through that, MBSB has now emerged as the second largest Islamic bank in the country.

However, that merger did not address EPF’S large shareholding in MBSB where it still owns 60%.

Prior to that, MBSB had began talks to merge with Bank Muamalat but that deal was called off in 2016.

Bank Muamalat’s biggest shareholder Drb-hicom Bhd needs to reduce its stake to at least 40% from its current 70% to fulfill Bank Negara requirements.

Another 30% of Bank Mualamat is held by sovereign wealth fund Khazanah Nasional Bhd.

Back to the MIDF and Al Rahji merger, sources say that the proposed merger will result in PNB recording a substantial gain on disposal of more than Rm300mil, as the deal is structured as an acquisition of MIDF by Al Rajhi Malaysia.

“This will be positive for PNB considering that the local stock market performance has been muted this year,” says an analyst.

The proposed merger is understood to be via a share swap.

Following the completion of the merger, the deal would see MIDF transforming into a full-fledged Islamic bank, which would give it the right to take deposits.

MIDF is involved in investment banking, development finance and asset management.

Meanwhile, Al Rajhi Malaysia is in commercial and retail banking.

“The merger would complement both parties as Al Rajhi Malaysia’s strength is in corporate and commercial banking while MIDF has an investment business and it is big in providing financing to the SME sector,” says an analyst.

An industry expert points out that with a full bank licence, this group could venture into just about any financial service, while having the ability to take deposits to lower their cost of funds. Furthermore, Al Rajhi doesn’t have a wide branch network which puts this new group in a good place to grow their digital offerings in Malaysia.

In terms of the size of both entities, Al Rajhi Malaysia has a larger asset size compared with MIDF. However MIDF has a bigger book value, taking into account its capital.

That is why PNB will emerge as a majority shareholder of the merged entity with more than 60%, if and when the merger is approved.

The balance equity will be held by the Saudi Arabia-based Al Rajhi Bank, which wholly owns its local entity.

Notably, Al Rajhi Bank is the world’s largest Islamic lender by assets.

According to its 2018 annual report, Al Rajhi Malaysia had total assets of Rm7.58bil, while MIDF’S stood at Rm5.82bil for the same period.

Al Rajhi’s shareholder equity stood at more than Rm700mil while for MIDF the figure was bigger at Rm1.68bil as at Dec 31, 2018.

On a back-of-the-envelope calculation, the deal could create an entity with combined net assets of Rm13.4bil, which is still considered small in comparison to the industry.

Among the biggest standalone Islamic banks in the country are Bank Islam Malaysia Bhd, MBSB and Bank Muamalat with assets of Rm63.9bil, Rm44.1bil and Rm22.8bil, respectively.

Interestingly, since last year, MIDF has been beefing up its investment banking team starting with the appointment of veteran banker Datuk Charon Wardini Mokhzani as its group managing director in July.

This was followed by appointments of several heavyweights of the industry namely Datuk Dominic Silva as the chief executive officer of MIDF Amanah Investment Bank Bhd two months ago.

He was formerly the head of investments at Khazanah Nasional Bhd and an executive director there for nine years.

MIDF also appointed Ahmad Gazzara Czillich, formerly with Danajamin Nasional Bhd, as its co-head of debt markets, as well as Ahmad Farouk Mohammed, who was formerly from the Khazanah’s investment team. The recent appointment is Linda Yeow as the director of corporate finance of MIDF Amanah Investment Bank.

She was formerly deputy chief financial officer at Malaysia Airlines Bhd and prior to that, she spent 15 years at CIMB Investment Bank.

Clearly, a bigger plan is being hatched by MIDF and this proposed merger is likely to be a beginning of a new journey for the group.

The merger would complement both parties as Al Rajhi Malaysia’s strength is in corporate and commercial banking while MIDF provides financing to SMES.

An analyst