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Third time unlucky

It’s third time not so lucky for Malaysia’s ambition to create a national banking giant. Investors are cheering the apparent failure of a $ 20.5-billion deal that would have seen CIMB Group merge with two of its smaller rivals to create the country’s largest bank by assets. A fiddly structure and a deteriorating macroeconomic outlook appear to be the behind the upset of another big government-backed deal.

It was never going to be easy to execute the three-way tie-up that would have been the country’s largest M&A deal. The original plan, first outlined in October, was for RHB Capital to issue shares to acquire the much larger CIMB. The latter’s privately held Islamic banking subsidiary would then to acquire another listed bank, Malaysian Building Society.

The deal faced obstacles from the start. The country’s bourse banned the state-backed Employees Provident Fund – a major shareholder in all three banks – from voting on the planned tie-up, empowering Aabar, RHB’s potentially disruptive sovereign shareholder. The offer valued RHB shares well below the 10.8 ringgit per share that the Abu Dhabi fund paid in 2011.

Any room CIMB had to improve the terms evaporated as its operations deteriorated. The bank has been hit by higher than expected provisions for non-performing loans at its Indonesian unit, which accounts for almost a quarter of its pre-tax profit. Things also look worse at home where oil prices – now at a six-year low – threaten a prolonged budget deficit which will hurt economic growth. That has dragged down the share prices of all three banks.

Investors drove CIMB shares up more than 10 per cent on January 13, reflecting relief that a bank with an already mixed record of delivering synergies would be spared the effort of trying to outdo itself. The proposed deal was the third attempt by the bank to merge with RHB, after previous efforts failed in 1998 and 2011.

For Malaysia’s government, the failed banking deal follows hot on the heels of the controversy surrounding 1Malaysia Development. The sovereign investment vehicle missed a loan repayment in December, calling into question an initial public offering of its energy assets in what would be one of the country’s largest stock market listings. It’s been a bad deal-making month for Malaysia.

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