Moody's say MBSB merger is credit positive

Moody’s Investors Service said that a merger between Asian Finance Bank (AFB) and Malaysia Building Society Berhad (MBSB) would make the latter credit positive.

This is because the merger, according to Moody’s, would enable MBSB to gain access to cheaper source of funds and enable them to broaden their revenue stream.

The two companies had been working on the proposed merger since June this year after receiving approval from Bank Negara Malaysia (BNM) to commence negotiations with their respective shareholders.

However, detailed plans on the merger has yet to be made public.

This is because the merger, according to Moody’s, would enable MBSB to gain access to cheaper source of funds and enables them to broaden their revenue stream.

MBSM was the sixth-largest financial institution in Malaysia at the end of March 2017.

The cheapest source of funds, in relative to other common methods on raising funds by banks, is through the retail current account and savings account (CASA) product. And the entry of MBSB into the CASA deposit market would further escalate competition for low cost deposits among banks that are not integrated into larger banking organizations.

This may change the landscape on the Islamic banking sector post-MBSB merger.

Moody’s said the smaller banks in Malaysia are “more reliant on costlier fixed deposits, which increases their funding costs”.

Moody’s added that the Islamic banking sector as a whole gets a larger share of deposits from corporates than conventional banking, as a result, Islamic banks have relatively low liquidity coverage ratios (LCR) than conventional.

Detailed plans on the merger has yet to be made public.

Another dimension to the story on Islamic banking is that new rules have set the stage for a stable funding ratio that might be challenging Islamic banks to face further tightening of liquidity management.

“Smaller Islamic banks in Malaysia have been trying to secure more retail CASA deposits” said Moody’s.

It is not clear if these banks have been successful in their efforts to do so.

The rating agency however is pessimistic if a broader Islamic banking sector consolidation will follow post the AFB-MBSB merger however.

“Favorable operating environment will allow standalone Islamic institutions to fare well on their own. This merger are driven by unique circumstances that are not shared by other (institutions)” Moody’s said.