The predicament of banking doyens
Tycoons looking to sort out shareholding issues
THE unwritten “grandfather rule” in the local banking scene, which was first applied to three seasoned bankers, may be the push for the next banking sector consolidation.
The three are Tan Sri Teh Hong Piow of Public Bank Bhd, Tan Sri Azman Hashim of AMMB Holdings Bhd (Ambank) and Tan Sri Quek Leng Chan of Hong Leong Bank Bhd (HLB).
Going by the “grandfather rule”, these three bankers have been allowed to hold more than a 10% stake in their banks, contrary to the Financial Services Act (FSA) 2013, which stipulates that no individual is allowed to hold more than a 10% interest in shares in any local financial institution.
It is widely understood that Bank Negara gave the exemption because these pioneer bankers had founded or acquired these banks even before the Banking and Financial Institution Act 1989 or Bafia (the FSA’S predecessor) was implemented in 1989.
Yesterday, Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus made it clear that the “grandfather rule” will not be extended to other individuals.
“Whatever approvals were given under Bafia for any individuals to exceed 10%, it is very specific to a group of shareholders who already own shares in excess of the 10% before the FSA came into force,” she told reporters at the second-quarter gross domestic product briefing.
That clearly puts pressure on the trio to sort out their shareholding structures.
“It is only logical for these tycoons to engineer the new shareholding structures rather than have their heirs sort it out,” private investor and former investment banker Ian Yoong tells Starbizweek.
Yoong notes that in many past cases, similar deals struck by the second generation have tended to be below what are deemed attractive valuations from the sellers’ standpoint.
The matter is less of an issue at Ambank where Azman holds 11.81% and is the second-largest shareholder after Australia and New Zealand Banking Group Ltd, which owns a 21.68% stake.
Over at Public Bank, Teh’s 23.41% stake in the banking group can be split into smaller blocks to be passed down to his children according to inheritance law, sources say. But they may still face issues related to limits on individual ownership in a financial institution as per the FSA.
The issue is trickier for Quek, who holds 62% in HLB. The 80-year-old tycoon, who is also HLB chairman, owns this stake via Hong Leong Financial Group Bhd, in which he has an indirect 77.88% stake.
Even if the tycoon applies the inheritance law and breaks up his block of shares to his children, it may not resolve the issue given the size of his shareholding.
A solution could be to dispose of a part of his stake or enter into a merger. But at a priceto-book (PB) ratio of 1.47 times, HLB shares are not cheap, being the second-most expensive banking stock after Public Bank with a PB ratio of 1.88 times. HLB’S market capitalisation, meanwhile, stood at Rm45.26bil based on yesterday’s price of RM20.88.
One name that has cropped up in relation to a potential takeover of HLB is Permodalan Nasional Bhd-owned Malayan Banking Bhd (Maybank), which is possibly the only local bank with the balance sheet to acquire the former.
However, an acquirer may have to stomach a relatively sizeable goodwill and face an earnings per share (EPS) dilution in a cash offer deal, point out analysts.
A share-swap transaction, meanwhile, will be broadly neutral for HLB’S shareholders but
much of this depends on the terms of acquisition, analysts say.
If indeed there is a deal forthcoming, it is likely to be via a cash or shares deal, points out one banking industry veteran. This is because HLB shareholders may not be keen on swapping their equity of what they perceive to be a well managed bank for ownership in a less successful financial institution.
For the cash part, the acquirer could raise the money via issuance of bonds but it could be tough to raise bonds in the current climate as compared to one year back.
The major attraction for potential acquirers of HLB is its key operating metrics. The bank has the lowest loan-to-deposit ratio, second-highest loan-loss coverage ratio and the second-lowest cost-to-income ratio among peers in the sector.
HLB also has a sizeable market of small and medium-sized customers, a segment that has been hotly pursued by banks in recent years. Besides this, a potential acquirer will also get exposure to HLB’S growth in China via its associate, Bank of Chengdu.
Shareholding issues aside, observers note that local banks have been institutionalised over the years with professional management now running banks. Notably, Teh and Azman have retired as chairmen in their respective banks.
However, it has been a while since Malaysian banks have gone down the merger and acquisition (M&A) route. Attempts in the recent past by both Ambank’s major shareholders – ANZ and Azman – to dispose of their stakes have not been successful.
“For now, there are a lot of rumours. It all boils down to having the will to do an M&A. Then there is of course the issue of valuations,” quips a head honcho of a local bank.
The Malaysian banking sector witnessed a major shake-up in terms of M&AS in 2001, when 54 financial institutions were merged into 10 anchor banking groups post the Asian financial crisis of 1997.
The “guided merger” was implemented by the central bank in the face of the banking crisis perpetrated by the Asian financial crisis.
Today, technology and digitisation are creating opportunities for new players like digital banks in the banking space.
Back to Quek, the tycoon has more wins than misses in his corporate maneuverings.
Who could forget that he netted a whopping Rm11bil – the highest price ever paid for an Asian bank then – when he sold his controlling stake in Dao Heng Bank of Hong Kong to Singapore’s DBS Bank in 2001.
For now, HLB remains a prized asset of the entrepreneur’s sprawling Hong Leong/guoco empire.
Formerly MUI Bank, Quek bought the bank and its entire branch network from Tan Sri Khoo Kay Peng of the MUI Group in 1994. In 2011, HLB expanded its branch network in a merger with EON Bank group and is today the fifth-largest banking group by assets.
Besides HLB, the tycoon also has a 16.2% stake in Hong Kong’s Bank of East Asia Ltd, which holds a strategic 23.9% equity interest in Affin Bank Bhd.
Insiders reckon that a deal involving Quek selling HLB has always been on the cards, with the tycoon perhaps intending to focus on managing his other assets and funds in Singapore, the United Kingdom and Hong Kong.