Malaysia Building Raises Bar on Loan Coverage for License

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Malaysia Building Society Bhd., a lender controlled by the country’s biggest pension fund, plans to adopt stricter coverage standards for loan impairments as it prepares to become an Islamic bank.

The company known as MBSB wants to raise its loan-loss coverage ratio from about 80 percent to 100 percent, matching the level most banks have in Malaysia, Chief Executive Officer Ahmad Zaini Othman said in an interview on Friday. As a non-bank financial institution, MBSB is currently not required by the central bank to adhere to a more stringent benchmark to protect itself from future losses.

MBSB has been seeking to turn into an Islamic lender after a plan to combine with CIMB Group Holdings Bhd. and RHB Capital Bhd. collapsed in January. MBSB’s loan-impairment coverage was raised as a concern in the merger discussions and could weaken its ability to negotiate a better transaction price in any talks with future merger partners, Ahmad Zaini said.

“If we aspire to become a bank at some point, we should really have these standards in place now,” he said. “We don’t want the same issue to be raised at the time when we want to go into a new merger and acquisition: we can’t pay you ‘x’ price because your standards are not up to the banking standards.”

The three-way deal would have been the country’s largest merger transaction ever and created a lender with the clout to win bigger sukuk deals from global institutions such as HSBC Holdings Plc and Standard Chartered Plc.

While MBSB has the authority to provide financing to companies and consumers without a banking license, it plans to obtain a permit and may do so through a merger or acquisition this year or next, Ahmad Zaini said.

Possible Target

The management’s preference is to acquire, and options will be presented to Employees Provident Fund, its main owner, he said, without providing a timeline. He named Bank Islam Malaysia Bhd., owned by BIMB Holdings Bhd., as a possible target.

BIMB CEO Zukri Samat “has confirmed that the possibility of a merger with MBSB is not in the business plan of Bank Islam,” according to an e-mailed statement from BIMB.

MBSB plans to raise 3 billion ringgit ($832 million) as early as next month through the sale of hybrid securities and a rights offer to bolster its capital and prepare for a possible acquisition, Ahmad Zaini said.

Before today, MBSB shares had slumped 13 percent since the CIMB-RHB transaction was called off on Jan. 14. They had risen 48 percent in the three years through 2014, outperforming the benchmark FTSE Bursa Malaysia KLCI Index’s 15 percent gain.

Merger Hurdles

“When you don’t want to go ahead with a party, you can only say that these people are not dressed for the occasion,” Ahmad Zaini said, referring to the negotiations with CIMB and RHB. MBSB’s approach to loan coverage was raised in talks “to pressure on the pricing,” he said.

RHB declined to comment in an e-mailed response to questions, while CIMB didn’t reply to an e-mailed request for comment.

Unfavorable economic conditions aside, the deal was aborted partly because it would have been difficult for the enlarged bank to proceed with necessary job cuts at a time when the nation’s flagship carrier was planning a “massive retrenchment,” Ahmad Zaini said.

Malaysian Airline System Bhd. said in August it would cut 6,000 jobs as part of a plan to restore profitability.

MBSB’s total assets have expanded more than eightfold in the 10 years through 2014 to 37.7 billion ringgit, according to data compiled by Bloomberg. Malayan Banking Bhd., the country’s biggest, has almost 183 billion ringgit in total assets, the data show.

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