Three of Malaysia's largest financial institutions are in talks to combine their businesses, a move that would create one of southeast Asia's biggest lenders by assets as well as build what they said would be a "mega Islamic bank" amid rapid growth in Islamic finance.
It would also mark a fresh wave of consolidation in the sector as banks in the region jostle to take advantage of closer financial integration among the 10 members of the Association of Southeast Asian Nations.
The banks said they had received regulatory approval to start negotiations with the aim of merging RHB and CIMB, as well as creating an enlarged Islamic banking franchise with MBSB.
The combined entity would have assets of Rm597 billion ($188 billion) as of the end of 2013, overtaking Maybank's Rm560 billion. It would also rank as Asean's fourth-largest bank after Singapore's top three of which DBS – Singapore's largest – has assets of S$419 billion (US$337 billion), according to Bloomberg data.
Robust domestic economies, relatively high savings rates and the emergence of companies with regional ambitions have turned Asean, with a combined population of about 650 million, into a lucrative banking market.
Malaysia, the bloc's third-largest economy after Indonesia and Thailand, is also by far the largest center in Asia for Islamic finance, driven by its majority Muslim population and strong financial and political links with the Middle East.
Islamic banking assets in the country totaled Rm434 billion at the end of May, representing 21 per cent of total system-wide assets, compared with 16 per cent at the end of 2009, according to Moody's.
It estimates that the Rm3.25 billion of ringgit-denominated sukuk issued by Islamic banks in Malaysia in the first half of the year was the largest in any year so far.
"The opportunity to be a part of a mega Islamic bank is exciting for us and we want to take this forward," said Ahmad Zaini bin Othman, MBSB's chief executive.
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Malaysia's banking industry underwent consolidation in the wake of the Asian financial crisis of the late 1990s, producing a top tier of three banks: Maybank, CIMB and Public Bank.
CIMB, under Nazir Razak – the brother of Malaysian prime minister Najib Razak – has been transformed in the past decade from a small investment bank in Kuala Lumpur to one with an extensive commercial and retail franchise across Asean. Last week Mr Nazir said he would step down after 15 years in the post, although did not name a successor.
Analysts have long expected further deals given that the market is still fragmented below the top three. "Malaysia has been an intensely competitive market so consolidation in general would be better for bank margins," said Harsh Wardhan Modi, Asean banks analyst at JPMorgan in Singapore.
CIMB and RHB share the same large stakeholder – the Employees Provident Fund, Malaysia's largest pension fund – which could facilitate any deal involving the two.
The EPF owns 14.5 per cent of CIMB and 41.3 per cent of RHB, as well as 65 per cent of Malaysia Building Society, according to Bloomberg data.
However some analysts questioned the move by CIMB, whose shares have fallen almost 12 per cent in the past year as the lender has taken longer than expected to integrate acquisitions, especially the Asian arm of Royal Bank of Scotland.
"Against the fairly limited set of synergies and benefits . . . there is a need to go beyond size for size's sake," said Kevin Kwek, analyst at Bernstein Research in Singapore.