Financial Markets and Banking Services

FACULTY OF BUSINESS AND MANAGEMENT

UITM CAWANGAN KELANTAN, KAMPUS KOTA BHARU

FIN435
FINANCIAL MARKET & BANKING SECURITIES

TITLE:
The rationale of the merger programme initiated by Bank Negara Malaysia for the banking
sector & the rationale for the integration of the merchant banks, stock broking companies
and discount house into investment banks

PREPARED BY:

NIK FARINA AZLIN BINTI OMAR 2019892968

NUR SYAZWANI BINTI LATIB 2019631216
NUR EKA AINAA BINTI ABD RAHIM 2019602096
NURULAIN IZZATI BINTI BAHARUM 2019608194

CLASS:
BA2422B

PREPARED TO:
MADAM NOR HALIDA HAZIATON BINTI MOHD NOOR

SUBMISSION DATE:

2nd DECEMBER 2019

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Table of Contents
1.0 The rationale of the merger programme initiated by BNM 3

Introduction

1.1 Details of merger programme 4

1.2 List of company merger 5

2.0 The framework on the creation of investment banks 6

2.1.1 Regulatory and supervisory framework7

2.1.2. Minimum capital requirement 7

2.2 The Rationale for the Integration of Merchant Banks, Stock Broking Companies
and Discount Houses into Investment Banks 8

2.3 Example Investment Bank mergers 9

2.4 Problem statement for the merger programme 10

3.0 Conclusion 11

4.0 References 12

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1.0 The Rationale of the Merger Programme Initiated by BNM

Introduction

Bank Negara Malaysia has set 31 March 1998 as the deadline for the finance companies to
identify their merger partners and agree in principle to the terms and conditions of the
merger. Under the merger programme, Bank Negara Malaysia has identified four Tier-1
finance companies and one or two others as anchor finance companies to merge with the
small and medium-size finance companies.

The merger of the Malaysian domestic banks was enforced by the government in the year
1999 after years of persuasion with little success. This study endeavours to measure the
impact of the involuntary merger on the efficiency gains. Merger and acquisition of domestic
banks improved the banks’ performance, profitability and value creation as indicated by
Bank Negara Malaysia in 1999.

The central bank of Malaysia (Bank Negara Malaysia) reassures banks to merge with other
banking institution in order to bring about the economies of scale and to provide a higher
level of efficiency. Subsequent to the mergers, there were only nine commercial banks left to
form a completely new corporation. The secondary data was derived from the nine domestic
banks from the year 2005 to 2009 were accumulated and analysed using the DEA method.
Mergers had unique advantages in terms of industry efficiency.

Bank Negara Malaysia announces today that all finance companies have responded to the
Bank's call to merge and that the first stage of the merger programme has been successfully
completed. The merger programme is one of the measures undertaken by Bank Negara
Malaysia to consolidate the finance company industry which is currently the most
fragmented industry. The programme is also part of an overall pre-emptive strategy of BNM
to further increase the resilience of the finance companies to withstand any risk from the
slowdown in the economy.

Those banking groups that have legally merged would now focus their attention towards
ensuring a smooth transition in the integration process of their businesses. Efforts would
continue to be channelled towards strengthening the core groups of domestic banking
institutions to become significant players in the domestic market. Regulatory and supervisory
reforms would also be introduced to further enhance the resilience and competitiveness of
the domestic banking groups as well as to enhance corporate governance in the banking
system.

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1.1 Details of merger Programme

There are 39 finance companies, more than 70% of the finance company business is
concentrated in 5 or 6 larger finance companies. Bank Negara Malaysia has identified four
Tier-1 finance companies and one or two others as anchor finance companies to merge with
the small and medium-size finance companies.

Mergers would only be allowed if the merged entity would be fully capitalised at all times.
Final approval would be contingent upon the completion of upfront due diligence review by
reputable international accounting firms. The due diligence would also assess the possible
further deterioration in asset quality during the course of the year. By strict upfront due
diligence in arriving at the purchase consideration, BNM is ensuring that the merger
programme would be market-based and transparent and that the purchase consideration
would be fair to all parties.

In cases where the assets and liabilities of the finance company are absorbed by the
commercial bank within the group, the commercial bank would be allowed to convert some
of the finance company branches to commercial bank branches. Foreign-owned banks that
absorb the business of their finance company subsidiaries would be allowed to relocate the
same number of their existing bank branches. In all these cases, the commercial banks will
not be allowed to conduct new hire-purchase business. The commercial banks are only
allowed to manage and wind down the existing hire-purchase portfolio of the finance
companies.

To protect the interests of the Government, and minimise costs, efforts in loan recovery will
continue and specific incentives are being incorporated into the programme so that there is
sharing of any upside benefits between the Government and the acquiring finance
companies. Under this arrangement, 80% of all recoveries or liquidation of assets of the
institution being acquired will accrue to the Government, while the remaining 20% will go to
the acquiring institution.

The acquiring institutions are given the flexibility to implement cost rationalisation measures
that may be necessary for future viability and in order for them to realise maximum benefits
from the mergers.

BNM will be reviewing the regulatory framework governing the operations of finance
companies as well the scope of finance company activities after the consolidation of the
finance company industry has been completed.

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1.2 List of company merger

The six anchor finance companies that have agreed to merge with the smaller finance
companies and their respective merger partners are as follows:

Anchor Finance Company Merger Partner

1. Maybank Finance
Berhad
2. Public Finance Berhad
3. Hong Leong Finance
Berhad
4. Arab-Malaysian
Finance Berhad
5. EON Finance Berhad
and Credit Corporation
(Malaysia) Berhad
6. United Merchant
Finance Berhad
Amanah Finance Malaysia Berhad
Kewangan lndustri Berhad
Boon Siew Finance Berhad
Bolton Finance Berhad
Kewangan Bersatu Berhad
Abrar Finance Berhad
SimeFinance Berhad
Advance Finance Berhad
City Finance Berhad
Cempaka Finance Berhad
Perkasa Finance Berhad
BBMB Finance Berhad
Perdana Finance Berhad
lnterfinance Berhad
Delta Finance Berhad

To ensure that the financial position of the acquiring anchor institution is not weakened, and
for the Government to contribute its part in this effort to consolidate the industry through the
merger process, the Government will extend a one year guarantee to the acquiring anchor
institution in the event of any further reduction in value of the acquired assets which will be
determined after a due diligence review.

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2.0 The Framework on the creation of Investment Banks

Bank Negara Malaysia announces today that the framework on the creation of investment
banks has been finalised and will be ready for implementation in the second half of 2005.
The framework is among the key initiatives to strengthen the capacity and capabilities of
domestic banking groups to contribute towards economic transformation and to face the
challenges of liberalisation and globalisation. It also aims to rationalise the discount house
industry towards developing a more resilient, competitive and dynamic financial system.
Following the successful rationalisation of commercial banks and finance companies within
banking groups, this model is now extended to rationalise merchant banks, stockbroking
companies and discount houses within the same banking groups. Discount houses which do
not have merchant banks in their groups would also merge with another discount house to
become merchant banks, and subsequently be transformed into investment banks when
they merge with stockbroking companies. These market intermediaries currently undertake
and offer similar products and services.

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2.1.1 Regulatory and supervisory framework

 Investment banks will hold two licences issued pursuant to the Banking and Financial
Institutions Act 1989 and the Securities Industry Act 1983 respectively. They will be
co-regulated by Bank Negara Malaysia and the Securities Commission. Bank Negara
Malaysia and the Securities Commission will adopt an objective-driven approach to
maximize efficiency and effectiveness in regulating investment banks.
 Bank Negara Malaysia will be responsible for the prudential regulation of investment
banks to preserve their stability and soundness. The thrust of the Securities
Commission’s regulations would be to promote market integrity and investors’
protection. Both regulatory agencies will have powers to prescribe and enforce
regulations, supervise and conduct inspections on investment banks to meet their
objectives. The philosophy of regulation would be to balance financial stability whilst
promoting efficiency and competition.

2.1.2. Minimum capital requirement

 Pursuant to Section 14 of BAFIA, investment banks that are part of banking groups
will be required to comply with the minimum capital funds unimpaired by losses
requirement of RM2 billion on a banking group basis, while investment banks that are
not part of banking groups will be required to comply with a minimum capital funds
requirement of RM500 million.

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2.2 The Rationale for the Integration of Merchant Banks, Stock Broking Companies
and Discount Houses into Investment Banks

The integration will enhance their efficiency and effectiveness by minimising duplication of
resources and overlapping of activities, leveraging on common infrastructure and reaping
benefits of synergies and economies of scale. It will also strengthen their potential to
capitalise on business opportunities, increase their competitive advantage and leverage on a
larger capital base to support their expanded range of activities. Customers will also benefit
from wider access to financial services at more cost-effective prices. With enhanced
capacity, the new investment banks would also play a greater role in developing a more
dynamic and efficient domestic capital market. Another reason, why the bank decide to
merge with another bank is synergy; the idea that by combining business activities,
performance will increase and costs will decrease. Essentially, a Bank will attempt to merge
with another Bank that has complementary strengths and weaknesses. Next, growth;
mergers can give the acquiring bank an opportunity to grow market share without having to
really earn it by doing the work themselves - instead, they buy a competitor's Balance Sheet
for a price. Lastly, eliminate competition; many mergers allow the acquirer to eliminate future
competition and gain a larger market share. The downside of this is that a large premium is
usually required to convince the shareholders of the target company to accept the offer

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2.3 Example Investment Bank mergers

Maybank Merger with Pacific Bank on Schedule for 1 January 2001

On December 2000, Maybank is pleased to announce that it has received approvals from
the relevant authorities with regard to its merger with Pacific Bank which will be effective
from 1 January 2001.

With effect from this date, all the branches of Pacific Bank will be known as Maybank.
However, during the transition period all customers can continue to:

 use the same account numbers

 use their existing ATM cards and PINs, cheque books and passbooks
 use the bank services that they had signed up for unless otherwise informed
 bank with their respective branches as usual

This arrangement will remain until the systems of both banks are fully integrated; and the
products, services and delivery channels are harmonised accordingly. Once the integration
process is completed, customers will benefit from the enlarged network and range of
products and services offered under the merged entity.

Although all branches will carry the Maybank corporate identity effective 1 January 2001,
customers of the two merged banks will have to conduct their banking businesses at their
respective branch and ATM networks only, until the full systems integration is completed.

All customers will be kept informed of the progress of the integration process to minimise
any inconvenience.

Banking hours will also be standardised, from 9.30am-4.00pm on weekdays and 9.30am -
11.30 am on Saturdays (or Thursday for States having weekends on Friday).

In addition, customers of Maybank and Pacific Bank will no longer be charged the standard
inter-bank rate of RM1 when making cash withdrawals via any of the others' ATM. For other
ATM transactions such as bill payments, fund transfers etc, customers will have to use the
ATM network of their previous banks for the time being

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2.4 Problem statement for the mergers programme

The results of investigation conducted about the merger programme by Bank Negara
Malaysia (BNM) for the banking sector

First of all, Bank Negara Malaysia (BNM) central bank of Malaysia has always encourages
banks to merge. Merge in banking industry was said to integrate the entire banking sector by
making both bank become more competitive and efficient

Then, the Malaysia’s central bank governor, Dr Zeti Akhtar Aziz stated that consolidation
among Malaysian banks is worthwhile because reap the benefits to be more integrated with
the foreign countries. If Malaysia bank to be bold in venture in next challenge stages of
development

Lastly, based on previous studies of Sufian and Habibulah who were studied on the effect of
merger of Malaysian banks, their finding shows that the merger of banks was success
especially for the small and medium size bank which have benefited from the merger and
economies of scale.

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3.0 Conclusion

The integration will enhance the banks and companies’ efficiency and effectiveness
by minimizing duplication of resources and overlapping of activities, leveraging on common
infrastructure and reaping benefits of synergies and economies of scale. It will also
strengthen their potential to capitalize on business opportunities, increase their competitive
advantage and leverage on a larger capital base to support their expanded range of
activities. Furthermore, the customers will also benefit from wider access to financial
services at more cost-effective prices. To facilitate this process, the legal and regulatory
framework governing the banking and securities industries would need to be fine-tuned and
fit together. This will be subject to prudential limits and regulations imposed by Bank Negara
Malaysia to ensure that market integrity and systemic stability is preserved at all times. The
merchant banks should also be developed into full- fledged investment banks, so as to be at
par with international investment banks and to have the ability to undertake trading and
brokerage activities, apart from merely providing advisory services. This is because the
mergers between merchant banks and other financial group will be encouraged and facilitate
to reduce duplication and improve efficiency as well as other imperfections in financial
activities.

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4.0 References

Consolidation and Rationalisation of the Domestic Banking Institutions. Retrieved from

http://www.bnm.gov.my/index.php?
ch=en_press&pg=en_press&ac=1272&lang=en#:~:targetText=The merger programme initiated
by,form their own banking groups.

Framework on the Creation of Investment Banks. (n.d.). Retrieved from

http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=934&lang=en

Merger of Finance Companies. Retrieved from https://www.bnm.gov.my/index.php?

ch=en_press&pg=en_press&ac=3065&lang=bm.

Rasiah, Devinaga, Ming, Teck, T., Hamid, & Abd, A. H. B. Mergers Improve Efficiency of Malaysian
Commercial Banks. Retrieved from
https://www.academia.edu/8097143/Mergers_Improve_Efficiency_of_Malaysian_Commercial_Bank
s.

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