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Banks need to conserve or raise capital to fulfil Basel III ruling [16-07-2013]  
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Increasing capital requirements on domestic banks are becoming a hindrance to further mergers and acquisitions (M&As) within the sector.

While it was speculated that new regulations such as the Financial Services Act (FSA) would be a catalyst to banking M&As, analysts are now saying that the need for banks to conserve or even raise capital to fulfil the new requirements is of more immediate priority.

“We believe that the implementation of the FSA is unlikely to trigger or accelerate M&A activities in the banking sector. One of the requirements of the FSA is that financial holding companies (FHC), which own more than 50% of the licensed financial institutions governed by Bank Negara, would also be subjected to the supervision of the central bank.

“As such, these FHC would also be subject to the Basel III capital requirements, going forward. Therefore, many of the banking groups under our coverage would be looking to strengthen or conserve their capital base, rather than undertaking M&As, which could drain their capital position,” Alliance Research banking analyst Cheah King Yoong said.

However, it could still happen via the issuance of shares, another banking analyst pointed out.

In the event that domestic banks are not able to meet the new requirements, the sector may see some restructuring.

One of the ways to address the shortfall in capital, if any, could be raising the equity at the FHC, but this could be earnings’ dilutive. Other options are disposing non-core assets or executing a dividend reinvestment plan that could help address the shortfall issue at these FHCs, Cheah said.

The FSA came into force on July 1 to mitigate risk.

Analysts drew the case of Affin Holdings Bhd’s failed attempt to buy Eon Capital Bhd in mid-2010, where Bank Negara’s rejection was speculated to be brought about by Affin’s small size and position. Affin had proposed to acquire Eon Cap via a combination of cash and issuance of shares and also a possible rights issue.

“We do not rule out that these banking groups may still undertake opportunistic M&As for other strategic or operational purposes, such as strengthening their dominance in the domestic and/or regional markets, but this is unlikely to be induced by the implementation of the FSA,” Cheah said.

Another banking analyst said that Malayan Banking Bhd (Maybank) and Public Bank Bhd would not be affected, as the listed entity was the same as the regulated entity.

However, other banking groups such as CIMB Group Holdings Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd and Hong Leong Financial Group Bhd would still need to wait for Bank Negara’s guidelines on what sort of capital ratios they would need to upkeep.

Going forward, the possibility of Bank Negara raising the capital requirement ratio in 2019 is of concern. Under the counter-cyclical buffer, the Basel Committee has allowed each country’s central bank to increase the capital requirement ratio by 0% to 2.5%.

This means that the maximum capital ratio Bank Negara could impose on banks is 9.5%.

While most banks have already met the Basel III common equity tier-1 capital requirement ratio (CET 1) of 7%, there is a worry that some banks may not be able to meet the additional 2.5%.

As of March 31, 2013, Maybank’s CET 1 stood at 10.2%, while CIMB’s was only at 8.2%.

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