RHB Capital Bhd surged to a 14-year high after CIMB Group Holdings Bhd and Malayan Banking Bhd won central bank approval to begin separate merger talks, triggering a battle to potentially create Southeast Asia's biggest bank.

The Kuala Lumpur-based lender jumped 8.4 per cent to RM9.99 at 10:35 a.m. in Kuala Lumpur trading, set for its highest close since March 1997. With a market value of RM22.1 billion (US$7.3 billion), this would be the biggest banking deal in the Asia-Pacific region in the past three years, according to data compiled by Bloomberg.

Maybank, as the nation's largest lender is known, and CIMB, headed by the prime minister's brother, aim to cement their dominance as the central bank grants more licenses to overseas lenders including Bank of China Ltd Smaller rival Hong Leong Bank Bhd last month bought EON Capital Bhd, and ECM Libra Financial Group Bhd. is said to be seeking a buyer.

'In the past big players like Maybank thought that it didn't make much sense to acquire the bank next door because there'd be overlapping of customers,' Ang Kok Heng, who oversees US$292 million as chief investment officer at Phillip Capital Management Sdn Bhd, said in a telephone interview. 'The strategy now is different whereby they want to build up a bigger asset base, which will put them in a better position to compete for overseas financing mandates.'

Region's Biggest Lender

The combined capitalization of CIMB and RHB would be US$27.3 billion, based on yesterday's closing prices. Maybank could boost its market worth to US$28.8 billion, which would exceed the US$27.7 billion value for Singapore's DBS Group Holdings Ltd, the region's largest lender.

'Potentially, this could lead to a bidding war for RHB,' said Jason Chong, who helps manage about US$1 billion of assets as chief investment officer at Manulife Asset Management (Malaysia) Sdn Bhd in Kuala Lumpur. 'The merger of RHB and CIMB would make more sense because with Maybank, there will be a lot more duplication of assets in terms of branches.'

RHB was last month overtaken as Malaysia's fourth-biggest lender by assets following Hong Leong's takeover of EON. RHB has operations spanning all key areas of financial services, including a branch network, treasury, investment banking and Islamic finance.

Open to Offers

'RHB will consider all proposals that are beneficial to shareholders,' Azlan Zainol, chairman of RHB's banking unit, said in a phone interview yesterday. Azlan is also chief executive officer of the bank's biggest shareholder, state-run pension fund Employees Provident Fund, which holds a 45 per cent stake, according to data compiled by Bloomberg.

Abu Dhabi Commercial Bank PJSC has said it's seeking to sell its 25 per cent RHB interest. The United Arab Emirates's third-biggest bank by assets appointed Goldman Sachs Group Inc and Bank of America Corp's Merrill Lynch and Co to advise on an exit, Chief Executive Officer Ala'a Eraiqat said in April.

Abu Dhabi may sell its RHB stake to its sister company Abu Dhabi Investment Council, the Star reported today, citing an unidentified person. It identified three top bidders for the stake at a board meeting yesterday after receiving bids from Japan's Sumitomo Mitsui Financial Group Inc, an unidentified Chinese bank and several private equity firms including Carlyle Group, the report said. The bidders have offered between two and 2.5-times book value for its RHB stake, it said.

and#8216;Early Days'

'It is incumbent on us to engage on this opportunity to put forward a value-creating merger between the two banks and support the national banking consolidation agenda,' Nazir Razak, group chief executive officer at CIMB, said in a statement yesterday. 'It is, however, very early days as negotiations have not even commenced.'

While Maybank is currently the country's biggest lender by both assets, its international investment banking operations have lagged behind rival CIMB.

CIMB, whose chief executive is the Malaysian prime minister's brother, temporarily overtook Maybank as the country's biggest company by market value last year. Its shares have risen 179 per cent over the past year, compared with a 15 per cent increase in Maybank's stock.

To help maintain its lead, Maybank last month completed the S$798 million (US$648 million) acquisition of a 44.6 per cent stake in Kim Eng Holdings Ltd, a Singapore-based securities and investment-banking group, which has offices in countries including Hong Kong, Thailand, the Philippines and India.

An RHB merger 'would be consistent with Maybank's vision to become the regional financial services leader,' Maybank said in an e-mailed statement yesterday.

Maybank's shares fell 0.9 per cent to RM8.83 today, while CIMB dropped 0.1 per cent to RM8.36.

Malaysia is likely to see further consolidation in its banking industry, Second Finance Minister Ahmad Husni Mohamad Hanadzlah said on May 19. In future, there may be banks that serve domestic needs and others that grow into regional brands, he said. -- Bloomberg