(The following statement was released by the rating agency) SINGAPORE, October 14 (Fitch) The 9 October announcement of the in-principal agreed terms of a proposed merger between Malaysian banks CIMB Group, RHB Capital, and Malaysia Building Society (MBSB) provide some additional clarity as to how they will address some of the challenges associated with the tie-up. The merger will not necessarily lead to downward pressures on CIMB's credit profile, however Fitch Ratings continues to highlight integration challenges and potential asset-quality weaknesses linked to the inclusion of MBSB in the new entity (see Fitch: Malaysian Bank Mega-Merger Comes with Risks, 14 July 2014). The announcement covered the basic terms of the deal, including pricing and structure. Notably, the impact on CET1 capital is likely to be limited as the transaction between CIMB and RHB will be done via a share swap. On a pro forma basis, the new banking group's CET1 capital is estimated by Fitch to be around 9%, down from 9.5% as reported by CIMB Group at end-June 2014. Management has highlighted the target of 9.5%, and may look to replenish capital if the ratio falls below 9.0% - potentially through asset disposals. If the deal goes through, cost synergies are likely to materialise only over the long term. CIMB has a track record in managing earlier acquisitions, although the successful execution for this proposed merger remains uncertain - given the larger scale of the transaction. Furthermore, being the country's largest bank with over 500 branches after the merger will mean that extracting synergies will require rationalisation of staff, and may face political hurdles. Asset quality is also likely to deteriorate slightly in the near term, owing largely to the inclusion of the smaller MBSB and its higher risk profile. Unsecured personal lending makes up the bulk of MBSB's loan portfolio. Yet the overall impact on the merged entity's loan quality should be relatively limited, as MBSB will only make up around 8% of the overall loan portfolio of the newly merged entity. The merger remains subject to the approval of the regulatory authorities and the respective shareholders of CIMB and RHB, with completion expected in mid-2015. A successful transaction will produce a Top 5 ASEAN bank which would be in a better position to grow regionally with the larger scale of its domestic operations. The planned creation of a new mega-Islamic banking entity - based on the combination of MBSB, CIMB Islamic and RHB Islamic - will also have the potential to enable the new bank to expand its Islamic banking business across borders, and help attract foreign strategic investors. Fitch believes that this merger may spur further consolidation in the Malaysian banking sector. No other proposed deals have yet been suggested, while additional tie-ups would be in line with the central bank's Financial Sector Blueprint to build larger and more efficient Malaysian financial institutions better capable of competing in the wider region. Contacts: Mihwa Park Associate Director Financial Institutions +65 6796 7238 Fitch Ratings Singapore Pte Ltd. #35-05, Suntec Tower 4 6 Temasek Boulevard Singapore, 038986 Ker Liang Oh Analyst Financial Institutions +65 6796 7237 Justin Patrie Senior Director +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.