After the RHB-AMMB proposed merger, talk of more M&As in the sector has resurfaced
WITH the ongoing merger talks between RHB Bank Bhd and AMMB Holdings Bhd, coupled with Bank Negara’s push for the institutionalisation of banks, the question of which banks will be the next merger and acquisitions (M&A) candidates has resurfaced.
Going by their size as the smallest banks in the country, could Alliance Bank Malaysia Bhd and Affin Bank Bhd be next?
This is the question that is making the rounds in banking circles.
According to banking analysts, there is a possibility of Alliance merging with Affin as they are very small banks.
“They will eventually feel the pressure to merge, given the market forces,” says one analyst.
Also, Affin is controlled by the Armed Forces Fund Board (LTAT), which is known to want to cast its net wider in the banking field.
“Additionally, Affin’s recent financial results demonstrate that its transformation plan is working out, while Alliance is a well-managed outfit and is doing well in its niche segment of small and medium enterprises. It makes sense for both entities to merge,” he adds.
However, recall, three years ago, Affin’s parent Affin Holdings Bhd had acquired Hwang-DBS Investment Bhd for RM1.36bil, edging out AMMB Holdings from the deal.
While the acquisition has given Affin a platform to carve its own niche with a stronger market presence in investment banking, some reckon that the return on the investment is still at the low end.
Then, there is the factor of Bank of East Asia Ltd (BEA), which is Affin’s second-largest shareholder with a 23.5% block.
Any M&A involving Affin would have to get the nod from the Hong Kong-listed BEA, where tycoon Tan Sri Quek Leng Chan has a strategic 14% stake.
In Alliance’s case, there were some changes in the shareholding structure of Alliance Financial Group Bhd (AFG)last year – the bank’s parent company – which suggested that there could be M&A-related developments for the bank.
Recall that last year, three individuals – financial corporate adviser Seow Lun Hoo, Singapore property tycoon Ong Beng Seng and one Ong Tiong Sin, who owns Singapore-based private equity firm RRJ Capital, had bought into Langkah Bahagia Sdn Bhd from Lutfiah Ismail, an associate of former finance minister Tun Daim Zainuddin.
The trio purchased the entire equity interest in Langkah Bahagia, which previously owned a 51% stake in Vertical Theme Sdn Bhd, the single largest shareholder in AFG with a 29.5% stake.
The remaining 49% stake in Vertical Theme is controlled by Duxton Investments Pte Ltd, which, in turn, is owned by Temasek Holdings Pte Ltd, Singapore’s sovereign wealth fund.
Via Vertical Theme, Temasek effectively has a 14.2% indirect stake in the financial group and thought to have management control of AFG.
It is to be noted that yesterday, Bank Negara approved AFG’s earlier proposed reorganisation, which included Alliance Bank taking over the listing status of AFG.
Meanwhile, industry observers reckon that the three individuals, who are well-known in corporate circles, are parties friendly to Temasek.
Beng Seng, who owns the Four Seasons and Hilton hotels in Singapore had previously joined hands with Temasek to buy up properties in London.
Nevertheless, owning stakes in banks has become all the more challenging, given that financial institutions are making frequent capital calls to boost their capital needs in order to meet international regulatory standards.
Capital-raising exercises are always an issue, especially for individuals. In this respect, the view is that because three individuals hold strategic stakes in AFG, it is ripe for a merger.
And a good fit could be Affin, which is small but has a strong institutional shareholder in LTAT.
“Whether this pans out is left to be seen. Because of the RHB-AMMB merger, all possible match-ups are coming up again,” says an investment banker.
There are eight local banking groups in Malaysia, namely, Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd, Public Bank Bhd, Hong Leong Bank Bhd (HLB), RHB Bank Bhd, AmBank Group, Affin Holdings and Alliance Bank Bhd.
Of the groups, Maybank, thanks to its strong capital levels due to its recent dividend reinvestment plan, has the financial war chest to initiate an M&A.
Public Bank and HLB remain the only two that have yet to court or be courted in recent times. In the case of Public Bank, its high valuations make it difficult for it to be swallowed up. Based on its last traded price of RM20.38 per share, Public Bank is trading at a massive 2.29 times price-to-book.
“It’s going to be difficult for any one bank to swallow Public Bank at its current valuations. One scenario could be to break down the units within the bank just like what happened between Affin and Hwang-DBS and sell these one by one.”
However, given its financial strength, Public Bank is likely to be the predator rather than the prey.
As for HLB, it last courted and bought EON Bank for RM5.1bil in 2010 after a long shareholder battle, valuing the deal at 1.4 times price-to-book.
Move to institutionalise
It is no secret that Bank Negara, especially in recent years, has sought to limit the ownership of individuals in local banks.
“As banks become bigger, there would be greater demand for capital that may not be met by individual owners... institutionalising the shareholdings of banks is seen as the right way to go, as is the case of mature markets like Singapore and Hong Kong,” says a banker.
Under Bank Negara’s Securities Industry (Reporting of Substantial Shareholding) Regulation 1998, individuals are not allowed to own more than a 10% stake each in a financial institution.In the case that happens, they are required to get approval from the central bank.
However, there is an exception or what is termed as the “grandfather rule” in the banking sector.
This is the unwritten rule that was first applied to the three seasoned bankers of Malaysia – Tan Sri Azman Hashim of AMMB Holdings, Quek of Hong Leong Financial Group Bhd and Public Bank’s Tan Sri Teh Hong Piow.
The individuals are allowed to hold more than a 10% stake in a bank, as their personal stakes in the respective banks were acquired before the Banking and Financial Institution Act 1989 or Bafia – the Financial Services Act 2013’s predecessor – was implemented in 1989.
In the case of the RHB-AMMB merger, if it materialises, analysts believe that Azman’s current 12.97% stake in AMMB will be diluted to about 6% in the enlarged entity, assuming he stays on as a shareholder.
Meanwhile, in terms of domestic institutions owning stakes in local banks, the Employees Provident Fund currently has a large stake of 40.7% in RHB Bank and is a substantial shareholder in all the other banks in Malaysia.
Permodalan Nasional Bhd, the country’s largest fund manager, is a controlling shareholder in Maybank with 48%, while LTAT owns a 35.4% direct stake in Affin Holdings.
Notably, Affin Holdings is working on a restructuring plan to transfer its listing status to Affin Bank.
In terms of the Islamic banks, pilgrim fund Lembaga Tabung Haji controls 52.5% of BIMB Holdings Bhd, which owns Bank Islam (M) Bhd.
Other government-linked investment funds, including the Retirement Fund Inc or KWAP, also have a presence in local banks.
Valuation issues
It is unlikely that banking mergers will take place at historical valuations of the past.
In a recent note to clients, CIMB Research says it believes that the price-to-book value for future banking M&As will be significantly lower than the historical average, given the decline in banks’ return on equity ratios arising from higher capital requirements under new financial regulations and thinning net interest margins.
Under the RHB-AMMB merger, RHB has proposed an all-share deal in order to acquire the assets and liabilities of AMMB at a potential pricing based on AMMB’s book value of one time. Gone are the days when banking transactions were done at a book value of more than three times.
The norm is probably closer to 1.4 times book value now. A year ago, most financial institutions here were trading at less than their book values.
Elsewhere in Europe, banks are still trading at less than book values, making Asean banks, which have seen their share prices rise this year, unattractive in terms of valuations.
As Europe’s economy is recovering, it is unlikely that foreigners would fork out hefty premiums for a stake in a bank that is based in the Asean region and which valuations are relatively higher when they can do the same for less in Europe.
Taking this into consideration, the only mergers in the local banking scene, going forward, are likely to be between domestic players. And that is what the central bank would like to see.
The question now is how long will the market have to wait before another merger comes into play. That could reignite an M&A theme in the banking industry – something that the local stock market can very well do with.
