US trade talks raise possibility of more M&A interest in local banks

KUALA LUMPUR: Malaysia’s potential move to ease foreign equity limits in its banking sector could open the door to increased merger and acquisition (M&A) interest from regional players, particularly targeting smaller banks such as AMMB Holdings Bhd (AmBank), MBSB Bhd, and Affin Bank Bhd, according to MBSB Research.

The research house, formerly known as MIDF Research, said that while the US has reportedly asked Malaysia to lift foreign-equity restrictions in strategic sectors as part of ongoing tariff negotiations, regional investors are more likely to lead the charge.

“We think more interest will come from regional players rather than the United States, especially countries such as China and Singapore, which have a strategic stake in Malaysia,” MBSB Research said.

The research house pointed out that several Western players, including Citibank and Standard Chartered, had exited the Asean market in recent years due to intense competition.

MBSB Research said AmBank remains a long-discussed M&A target due to its relatively smaller size and improving fundamentals, along with speculation that founder and key shareholder Tan Sri Azman Hashim “is willing to part with some shares if the valuation is acceptable”.

For Affin Bank, the research firm noted that Bank of East Asia is understood to have been seeking to divest its stake for some time.

Currently, Malaysia imposes a 30% cap on foreign ownership of commercial banks and a 70% limit for investment and Islamic banks, but these thresholds have often been bypassed.

“We think these thresholds have often been bypassed to avoid single-exposure risk, as there are not sufficient domestic investors,” MBSB Research noted.

By comparison, Malaysia’s rules are among the most restrictive in the region, the research house said.

It said Singapore allows up to 40% foreign ownership in domestic banks, while Vietnam raised its cap to 49% for selected banks in May, up from 30%.

Thailand limits foreign ownership in commercial banks to 25%.

In Indonesia, the cap is 40%, but higher stakes are possible with Bank Indonesia’s approval, provided the acquiring party meets requirements including public listing and sufficient capital strength.

According to MBSB Research, financial liberalisation “does have multiple benefits, most notably driving foreign direct investment interest and industry-wide improvements in efficiency and profitability. Unfortunately, this may come with large-scale rationalisation of work forces.”

The research house highlighted several upsides of financial liberalisation, including increased competitiveness in the banking sector through the introduction of global expertise, advanced technology, and improved risk-management practices.

It also expects higher foreign capital inflows and stronger corporate governance as a result of greater foreign participation.

Additionally, MBSB Research said increased competition could lead to better service quality and higher profitability across the industry, which would support improved valuations.

However, it cautioned that liberalisation may also lead to workforce rationalisation, especially as banks consolidate and continue to digitise their operations.

Overall, MBSB Research maintained its “neutral” stance on the banking sector, citing limited near-term re-rating drivers and persistent macroeconomic headwinds.

The research house said it continues to favour a bottom-up stock-picking approach, with a preference for defensive names, due to the “presence of industrywide headwinds, while tailwinds vary on a case-by-case basis”.

“An improved economic outlook remains the core re-rating driver, but we are not expecting this anytime soon,” the research house said, adding that “sentiment is further weighed down by any possible reinstatement of the goods and services tax and petrol subsidy removal”.

The research house named Public Bank Bhd and Hong Leong Bank Bhd as its top picks.