CIMB shares stumble, speculation of EPF’s next move rife

Published: 23 October 2014

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Shares of Malaysia's second-biggest bank CIMB Group Holdings Bhd dropped today after local media reported that the Employees Provident Fund (EPF), a key CIMB shareholder, may be forced to cut its stake to push through a planned merger.

Analysts say the stock market views the merger of CIMB, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) as a negative for CIMB, which they fear would be valued too cheaply. The amalgamation of the lenders would create Malaysia's largest bank which financial sources have said could have a market value of US$22 billion (RM72 billion).

CIMB could be valued as high as two times book value based on its growth potential, regional presence and asset quality, but the current deal values CIMB at only 1.7 times book value, according to the analysts. Any sign that the merger may go through would weigh on CIMB's stock, they say.

The stock exchange Bursa Malaysia barred the EPF from voting in the proposed merger because the state pension fund is a major shareholder in all of the banks, according to filings on Tuesday. The EPF, which bankers say is in favour of the merger, owns about 14.5% of CIMB, 41% of RHB and 65% of MBSB.

Local media reported that the EPF may reduce its stake in CIMB, thereby removing the issue of the fund's conflict of interest in the merger.

"There is a lot of speculation in the Malaysian press about what EPF will do next. A lot of that is not correct," said a source close to the merger talks, adding that at this stage, the EPF is unlikely to sell out of CIMB.

Kelvin Ong, a banking analyst at Kuala Lumpur-based MIDF Research, told Reuters that it would not be suitable for the EPF to circumvent the bourse's ban, referring to local media reports.

As of 0242 GMT, shares in CIMB fell 0.78%, RHB dropped 0.35%, while MBSB declined 1.92%. The benchmark stock index rose 0.51%.

The move by the stock exchange has given other investors in the banks more clout and thrown some doubt on the deal's prospects.

Abu Dhabi-based Aabar Investments and OSK Holdings Bhd, the second and third-largest shareholders in RHB, will now have a bigger say in the deal.

Both investors would see their combined voting power in the lender increase to 53% from 31% now that the EPF is barred from voting.

The proposal is for CIMB to enter into a share swap deal with RHB, the country's fourth-biggest lender. CIMB shareholders would own 70% of the merged entity and RHB shareholders would own the rest.

In tandem, the Islamic banking arms of CIMB and RHB would then acquire MBSB to form a mega Islamic bank.

"The deal is relatively in favour to the shareholders of RHB, and not CIMB," Pong Teng Siew, head of research at Kuala Lumpur based Inter-Pacific Research, told Reuters. "Although it sounds like RHB is taking over CIMB, it is actually CIMB buying their assets, and at a premium."

The three banks said they were aiming to sign a agreement in early 2015 and hoped to complete the deal mid-year. – Reuters, October 23, 2014.

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