New Bill will affect 3 firms

HLFG, CIMB and RHB Cap may have to overcome shortfall of capital requirement

PETALING JAYA: The upcoming Financial Service Bill (FSB), which requires stricter capital requirement for financial holding companies, will affect Hong Leong Financial Group Bhd (HLFG), CIMB Group Holdings Bhd and RHB Capital Bhd. At present, these holding companies are not governed by Bank Negara rulings.

Some banking analysts expect a core capital ratio (CCR) of approximately 8% for these holding companies, which is seen as a comfortable level.

The main concern now is that these financial holding companies may need to issue new shares to overcome the shortfall of the capital requirement, creating dilutive effects for existing shareholdes.

“While Bank Negara’s new FSB may require additional equity at financial holding companies, we believe that other measures could help address the shortfall issue, if any, at these companies such as disposing of non-core assets or executing a dividend reinvestment plan,” said a Kenanga Research report.

It added that these measures could eliminate the need to raise their capital, and thus, prevent a dilution in these financial holding companies’ earnings or a share overhang in their stocks in the market.

Currently, financial holding companies

Prior to this, the capital requirement applies only at the bank level. Under this new ruling, it will apply to the holding company, which I think is a healthy development for the medium to long term. — KENANGA RESEARCH REPORT

do not come under the purview of Bank Negara. For example, CIMB Group is not governed by Bank Negara; only its subsidiaries are. Thus, the CIMB Group does not need to report its consolidated CCR requirement.

A banking analyst when contacted said that the FSB was mainly for Bank Negara to have control over the holding company.

“Prior to this, the capital requirement applies only at the bank level. Under this new ruling, it will apply to the holding company, which I think is a healthy development for the medium to long term. I think an 8% CCR is fine and will still enable the banks to grow organically,” said one banking analyst.

He added that if these companies were not governed by Bank Negara, their expansion or acquisition of foreign banks, for instance, would be difficult.

“For example, if CIMB wanted to acquire Bank X in a certain country, the central bank of that country might not allow the acquisition to go through, knowing that CIMB is not governed by Bank Negara,” explained the analyst.

He said that CIMB and RHB Capital wwere unlikely to be impacted.

“CIMB is disposing of non-core assets and has a one-off dividend reinvestment plan (DRP) programme. CIMB’s management has estimated the group’s CCR at around 8% as at June 2012 and is now considering earnings retention via a one-off DRP. Management has further stated that its earnings retention plan, together with asset divestments, would be sufficient to boost its capital ratio if needed and that there is no urgency to issue new equity,” said a Kenanga Research report.

Kenanga added that CIMB’s CCR ratio should decline by 30 basis points (bps) to 40 bps after its acquisition of the Royal Bank of Scotland Group Plc’s Asian operations and Bank of Commerce in the Philippines.

“Management also guided that there would be a 30 bps to 80 bps rise in the CCR ratio from its possible divestment of CIMB Aviva Assurance Bhd, depending on the final sale price. All these suggest a range of between 7.6% and 8.4% for its CCR ratio following the above corporate events of the group,” said Kenanga.

It added that in RHB Cap’s case, with some capital boost from its DRP and the merger with OSK Investment Bank, management has indicated that the consolidated group CCR would be around 8.3%.

HLFG, on the other hand, could possibly be affected, according to an analyst from a foreign research house.

“In HLFG’s case, as it also has insurance and security businesses, where the capital requirement is higher, it may be affected. So, perhaps, there may be some kind of capital-raising exercise such as a rights issue,” opined the banking analyst.