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Hostile bid sparks rumors of more Malaysian mergers

A possible hostile bank takeover bid is creating shock waves in corporate Malaysia but analysts say it may just be the catalyst needed to spur a second round of banking consolidation ahead of market liberalization in 2007.

CIMB Bhd, a unit of the country's second top banking group Bumiputra-Commerce Holdings, said last week it will further pursue acquisition talks with the two main shareholders of smaller rival Southern Bank despite opposition from its board of directors.

CIMB's move has generated a stir in the industry, which has not seen any mergers since Malaysia's 54 banks and financial institutions consolidated into 10 anchor groups under a sweeping consolidation four years ago.

"The CIMB bid is shaping up to be a hostile takeover, which is rare in corporate Malaysia. But it is healthy in a way and may kick-start a second round of banking mergers," says Eltricia Foong, banking analyst with Hwang-DBS Vickers Research.

"With financial liberalization looming, smaller banks will have no choice but to consolidate. It is better for them to sell and lock in their premiums right now than see their value deteriorate when competition heats up in two years."

The 2001 restructuring was driven by the government to strengthen the banking sector after it was badly hit in the 1997-98 Asian financial crisis.

But a big gulf still separates the small and big banks among the 10 groups, making it tough for them to cope with competition when the government opens up the financial sector to foreign lenders in two years.

JP Morgan, in a research note, said CIMB's chase for Southern Bank has sparked other big players' interest in smaller banking groups, especially those with strong consumer franchises, good management and healthy balance sheets such as Hong Leong Bank and EON Capital.

But to avoid being gobbled up by bigger rivals, Hong Leong Bank, which is currently ranked sixth-largest in terms of assets, could make a bid for one of the other banks over the next six months, the research report said.
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