A Review On The Merging Of Malaysian Banks

Table of Contents

Table of Contents i

Table of Figures ii

Table Index iii

Acknowledgement iv

Abstract 1

Chapter 1: Introduction 2

1.1 Introduction 2

1.2 Overview of Mergers and Acquisitions (M&A) 3

1.3 Research Problem 3

1.4 Objectives of the Research 4

1.5 Scope of the Study 4

Chapter 2: Literature Review 5

2.1 Introduction 5

2.2 The Roles and the Consequences of Bank Mergers 5

2.3 The Challenges to Bank Mergers Success 8

2.4 The Post-Merger Performance of the Local Banks and the Foreign Banks 11

2.5 Impact of Bank Merger to the Future 15

Chapter 3: Research Methodology 20

Chapter 4: Discussion, Analysis and Finding 21

4.1 The Role and the Consequences of Bank Mergers 21

4.2 The Challenges to Bank Mergers Success 26

4.2.1 Foreign Competition 27

4.2.2 Competition from Capital Markets 27

4.2.3 Profit squeeze 28

4.2.4 Targeting New Lending Segments 31

4.2.5 Venturing into New Activities 31

4.2.6 Consolidation 32

4.3 Local Banks and Foreign Bank Post Merger 35

4.4 The Impact of Bank Merger to the Future 49

Chapter 5: Conclusion & Limitation 52

5.1 Conclusion 52

5.2 Limitation 53

Reference 54

Table of Figures

Figure 1: Research Methodology Framework 20

Figure 2: Number of Banks 23

Figure 3: Merger Program for Domestic Banking Institutions, as of the end of 2001 24

Figure 4: Objectives of Restructuring the Banking Sector 25

Figure 5: Foreign Banks' Branch Network Ð'- Current and Potential 42

Figure 6: Market Share of Domestic Loans 43

Figure 7: Ranking by Asset Size (2002, 2005) 44

Figure 8: Ranking by ROEs 45

Figure 9: Net Profit/ Branch Comparison (excluding Citibank) 45

Figure 10: Net Profit/Employee Comparison 45

Table Index

Table 1: Return-On-Assets Ratios Of The Top 10 Banks In 2001 37

Table 2: Return-on Equity Ratios of the Top 10 banks in 2001 39

Table 3: Key Financial Indicator for the 10 Anchor Banks 46

Abstract

Mergers and Acquisitions (abbreviated M&A) exercises taking place in Malaysia are just the beginning of a strategic transformation to enhance and upgrade the quality of the domestic financial sector to world class status, preparing them to embark on open competition in line with the World Trade Organization's (WTO) agenda for services. The second pressure for smaller domestic banks is the increasing scale of the three biggest banks, which are leaving most of the smaller banks behind. It is obvious that the smaller banks will neglect the window of opportunity to capitalize on their position as new anchor banks after the first wave of consolidation at the turn of the millennium. In general, this study aims to investigate the impact of the merger to the Malaysia banking industry as well as the impact of the liberalization of the financial market in Malaysia.

Chapter 1: Introduction

1.1 Introduction

Mergers and Acquisitions (abbreviated M&A) can be generally defined as activities involving takeovers, corporate restructuring, corporate control as well as changes in the ownership structure of firms in any industry. The past few decades have witnessed the fact that worldwide merger activity has increased dramatically. Individual transactions in terms of M&A are becoming larger and many of them are cross-border in nature. Many factors are affecting the M&A activities such as technological change, deregulation, and efficiency operations.

According to the Malaysian Accounting Standards Board (MASB) No 21, "merger" is defined as a business combination in which shareholders of the combining enterprises combine control over the whole, or effectively the whole of their net assets and operations to achieve a continuing mutual sharing of the risks and benefits attaching to the combined entity such that neither party can be identified as the acquirer. A merger is an important growth option. Merged enterprises are said to gain from economies of scale, benefit from cash flow savings, procure new customer base and eliminate business rivalry (Bala Shanmugam 2003).

1.2 Overview of Mergers and Acquisitions (M&A)

In terms of efficiency operations, reasons such as economies of scale by spreading the large fixed costs over large number of units, economies of scope by reducing costs of operations in related activities, and synergy among activities such as research and marketing are the main driving factors for M&A activity. Arguments in favor of M&A include critical step to healthy expansion of business firms, increase in value and efficiency of firms, and the opportunity to move resources to optimal use. On the other hand, arguments against the M&A activities include reasons such as no improvement were made subsequent to the acquisition, a mere redistribution of wealth from labor and other stakeholders,