MALAYSIAN Industrial Development Finance Bhd (MIDF) is making another attempt at becoming a full-fledged bank. Can it make it this time?

       In 2019, MIDF almost merged with Al Rajhi Banking and Investment Corp (M) Bhd to create a banking entity that would have had combined assets of RM13.43bil.

       But after two years of discussions, the plan was called off due to disagreements over the choice of syariah law implementation on the merged entity.

       Now, MIDF is seeking to merge with a bigger entity – the country’s second largest standalone Islamic bank, MBSB Bank Bhd, that has almost RM45bil in assets.

       On Wednesday, Malaysia Building Society Bhd (MBSB, the listed holding company of MBSB Bank) said Bank Negara has given it the green light to commence negotiations with Permodalan Nasional Bhd (PNB) for the acquisition of MIDF. PNB wholly owns MIDF.

       The Employees Provident Fund (EPF) is the largest shareholder in MBSB, with a 65.39% stake.

       Sources say the merger will likely take the form of an all share swap deal, resulting with the EPF emerging as the largest shareholder in the new entity.

       “Under the merged entity, EPF will own more than 50% stake while PNB, about 20%. This is based on the respective book values of the two financial institutions being merged,” one source says.

       With MIDF’s asset size of RM7.8bil, the merged entity is expected to see a combined asset value of RM52.8bil. This would place it in the ninth position among the 12 local banks in terms of asset size.

       MBSB is not new to M&A proposals. In 2014, the bank was part of the mega-merger proposal with CIMB Group Holdings Bhd and RHB Bank Bhd. That deal fell through but MBSB went on to complete a merger with Asian Finance Bank (AFB) Bhd in 2018.

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

       Tapping into the retail market

       Should the deal go through, MIDF will be part of a full-fledged Islamic bank, which means that it will be in a position to accept deposits and offer a variety of other products to its customers.

       An internal statement issued by MIDF’s management to its employees and sighted by StarBizWeek, it stated that the deal with MBSB would take MIDF to the next level and leverage the benefits of being part of a listed group.

       “The transaction will be good for MIDF, our employees and our clients, and is in line with our aspiration to form a banking group. We will have a bigger balance sheet and be able to offer a wider range of products to a wider range of customers,” the statement said.

       The management team of MIDF includes veteran banker Datuk Charon Wardini Mokhzani as its group MD, Datuk Dominic Silva as the CEO of MIDF Amanah Investment Bank Bhd and director of corporate finance Ahmad Farouk Mohammed.

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

       It started in the 1960s to help develop the country’s industrial sector by providing financing to small and medium enterprises (SMEs).

       To date, MIDF has distributed a total of RM16.7bil in financing facilities to over 11,976 such companies.

       MBSB, meanwhile, is in the space of consumer banking but more importantly it has a full banking licence. That would give MIDF the ability to strengthen its balance sheet and broaden its offerings, especially to the existing customer base of SMEs which grow in size and need more financial services.

       It is worth noting that MBSB used to be a non-bank lender. It only transformed into a banking entity in 2018 following the merger with AFB. MBSB acquired AFB in a RM644.95mil deal that was settled via cash and the issuance of new shares.

       Following the merger, AFB undertook a rebranding exercise and on April 2, 2018, it changed its name to MBSB Bank Bhd. It has been working to grow its current account saving account (CASA) segment. The CASA business is what banks thrive on to ensure customers keep their money with them. The CASA component appears to be the key for the next step of growth for MIDF.

       Angkasa conundrum

       However, a part of MBSB’s loan portfolio could be an issue as it consists of personal loans to civil servants that are tied to the credit system under Angkatan Koperasi Kebangsaan Malaysia Bhd (Angkasa).

       Angkasa is the national umbrella body for cooperatives whose members are made up of civil servants by virtue of them being the bulk of cooperative members. It was formed in 1971 by Royal Professor Ungku Abdul Aziz.

       While the objectives of creating Angkasa were noble, it has been alleged that the system has become a conduit for “wild” lending to civil servants.

       It was reported that some of the loans were given out to government servants with a monthly household income of less than RM3,000.

       MBSB’s personal financing segment that would include the loans to civil servants, accounts for 55% or RM19.8bil of its total financing of RM35.7bil, going by the banks financial year (FY) 2020 annual report. This is followed by property financing at 17.8% and other term financing at 16.5%.

       In FY2020, MBSB took a hit from non-performing loans due to the problems associated with the Covid-19 pandemic. The bank made provisions to the tune of RM925.7mil. Since 2018, the group has been working to diversify its portfolio.

       Kenanga Research, which has an “underperform” call on MBSB, noted that the proposed merger with MIDF is a positive surprise as it would inject new businesses into the group. The research house noted that the acquisition requires further boons to uplift sentiment amid disappointments in MBSB’s key financing business.

       The PNB angle

       PNB has been active in sweating some of its assets. Aside from arranging the new opportunity to merge MIDF with MBSB, the country’s largest fund manager is also overseeing the sale of Sime Darby Bhd’s healthcare arm to IHH Healthcare Bhd.

       IHH is looking to buy a 100% stake in Ramsay Sime Darby Hospital for an indicative offer price of RM5.67bil.

       Analysts reckon that proceeds from the sale could be divvied out to Sime Darby’s shareholders, where PNB holds 41.4%.

       Some quarters suggest that the recent corporate exercises by PNB is to buffer itself against any negative outcome from Sapura Energy Bhd, which is currently taking on a massive RM10bil debt restructuring exercise.

       Back to MBSB and MIDF, the merger between the two financial institutions is a space to be watched, especially with MIDF also vying for a digital banking licence in partnership with financial technology company BigPay.

       The coveted licence aside, an industry observer says: “The merged entity of MIDF and MBSB will already be in a position to provide banking services for digital banking customers.”