THE banking sector got a jolt recently when the family of the late Tan Sri Teh Hong Piow announced a plan to pare down their 21.6 per cent stake in Public Bank Bhd to comply with the Financial Services Act (FSA) 2013.
While the sell down plan is in the works — the idea is to do a staggered sale to existing stakeholders of Public Bank — it has drawn the spotlight to the FSA’s shareholding rule, which stipulates that no individual can own more than 10 per cent of a bank.
POTENTIAL EFFECTS ON QUEK’S HOLDINGS IN HLB
Specifically, the development draws attention to Hong Leong Bank Bhd (HLB), in which Tan Sri Quek Leng Chan owns an effective 50 per cent.
The Public Bank share sale development is also an affirmation that the ‘grandfathering ruling’ — which exempted individuals who had owned banks for a long time — will not transcend to the owner’s next generation.
A veteran investment banker shared with me an interesting point during Barclays Asia Forum last Thursday: the Teh family plans to sell their Public Bank shares at a discount to the market.
Note also that the Teh family announced last October that they are selling their 42.74 per cent stake in LPI Capital Bhd at a 25 per cent discount to the market price.
The LPI block of shares is being sold to Public Bank and will give the Teh children some RM1.72 bln in cash. The Teh family also plans to dispose of their Public Bank stake to directors and shareholders at a discount.
“So now for Quek, will the family also have to sell at a discount in the future? They may opt to resolve the shareholding issue sooner, in order to command a premium,” opined the banker.
This could lead to speculation of merger and acquisition (M&A) activity in banking, even though I was quite sceptical about the overall pace of M&A in the country.
The Tehs sold down their estate’s stake to 10 per cent over a five-year period, from 23.4 per cent, not because they wanted to.
They did so to comply with the FSA, a regulation that seems to have lost some relevance in today’s market landscape.
The reasoning behind having streamlined shareholding structures was simple. One of the main tenets of having the FSA was to protect the viability of the banks.
After the Asian Financial Crisis (AFC), many banks needed recapitalisation and this led to the formation of the anchor banks.
In Malaysia, however, banks have been increasingly well capitalised over the years.
They made good profit for an extended period of time, which only strengthened their bottom line and financials.
Forget about meeting Basel requirements, which are regulations that ensure banks have enough money to stay solvent and prevent governments from bailing out banks that spend beyond their means.
Our banks are way past that in terms of minimum financial strength that when the COVID-19 crisis hit the world, Bank Negara Malaysia (BNM) basically said, metaphorically speaking, that even if a nuclear bomb were to explode on top of the banking system, the banks would be all right.
So, there is really no need for the estate of the founders of the bank in today’s environment to trim down their stakes to be in compliance with the FSA just to protect the viability of the bank.
The requirement to trim down the original shareholding of the founder of the bank only penalises the entrepreneurial drive that led to the creation of the bank and generational wealth that followed.
By having the estate of the founders sell off the dominant stake to reduce it to a maximum of 10 per cent means that, in various circumstances, they find themselves no longer being the dominant shareholder.
So, where does this leave Quek?
Could the 83-year-old Quek seek to divest HLB to a larger banking group, for example?
To recap, the largest banks in Malaysia by assets are Malayan Banking Bhd, followed by CIMB Bank Bhd, Public Bank, RHB Bank Bhd, HLB and AmBank Bhd.
Public Bank and HLB have another long-standing feature that has long thwarted buying interest — they are expensive.
Public Bank’s share price-to-book value (PBV) is at 1.54 times, while HLB’s is at 1.17 times.
Their respective market capitalisation stands at RM87.2 billion and RM46 billion.
These banks are also known for their strong fundamentals and prudent management with among the best asset qualities vis-a-vis peers.
BROADER OWNERSHIP CHALLENGES IN BANKS
At AMMB Holdings Bhd (the holding company of AmBank), Tan Sri Azman Hashim’s shareholding is now 11.83 per cent — slightly above the 10 per cent limit — something that is not difficult to overcome.
Two other smaller banks with individual ownership issues come to mind.
One is Bank Muamalat Malaysia Bhd, in which Tan Sri Syed Mokhtar Albukhary owns a 39 per cent stake while Khazanah Nasional Bhd owns 30 per cent.
The state investment arm deems this investment as a non-core, indicating that it could be willing to divest it at the right price.
However, Bank Muamalat’s previous attempts at an M&A were unsuccessful.
Could a new round of talks, say with Bank Islam Malaysia Bhd (48 per cent-held by Lembaga Tabung Haji) come about following the Public Bank development?
Alliance Bank Malaysia Bhd’s shareholding, meanwhile, is complex.
Singapore state investor Temasek Holdings Ltd has an effective 14.2 per cent stake, while three individuals collectively own another effective 14.8 per cent.
One of those individuals is Ong Beng Seng who faces legal troubles in Singapore.
Could the central bank view these three as a group owning more than 10 per cent, circumventing the FSA rule?
Additionally, given its size of being the smallest of the country’s eight local banking groups, the bank is often viewed as an M&A target.
In the past, many parties in the financial industry have given up their shareholding for one reason or other.
EMERGING STATE INFLUENCE IN BANKING
The more recent cases involve Sarawak’s Taib family from RHB banking group and Melewar Group’s Tunku Datuk Yaacob Khyra from the insurance business of MAA Group Bhd.
In the case of the former, the Taib family reportedly exited RHB Bank because of Bank Negara restrictions on their influence on the management of the bank.
As for the latter, MAA sold 75 per cent-owned subsidiary MAA Takaful Bhd to Zurich Insurance Co Ltd for RM393.75 mln cash in mid-2016 due to Bank Negara’s high capital adequacy requirement for insurance businesses.
Meanwhile, a new group has emerged in the local banking landscape — the state government of Sarawak. BNM had approved a 31 per cent stake in Affin Bank Bhd, but it is unclear what conditions it will impose or if the bank’s strategic direction will change.
Two historical facts must be putting the regulators on alert.
One is that Sarawak, then under the leadership of the late Sarawak Governor Tun Abdul Taib Mahmud, had acquired a controlling interest in RHB Bank Bhd. Second is the fact that the state-owned Sabah Development Bank had accumulated substantial bad loans over the years.
By the end of May, its non-performing loans hit RM5 billion, making up a staggering 75 per cent of its RM6.6 billion total loan portfolio.
As the artery of the economy, banks are strictly regulated to protect consumers and ensure financial stability, considering the systemic risk if a bank fails.
FUTURE OF M&A IN THE BANKING SECTOR
I reckon future M&A may be driven not by the private sector or individuals, but by funds such as the Employees’ Provident Fund (EPF), which is the single largest shareholder in several banks.
A 10 per cent stake may not necessarily guarantee a board seat, as it would still require approval from the central bank.
Having forked out so much, will the individuals be content with merely capital appreciation and dividends?
Fragmented shareholdings or multiple strong institutional shareholders may not necessarily be beneficial for banks unless they work together from the beginning.
Strategic decisions could be disputed and growth could be slowed down.
Medecci Lineil has over a decade of experience leading a niche-focused team within Goldman Sachs’ investment banking division (IBD). His expertise extends beyond the bank, having been instrumental in establishing consultancy firms in Kuala Lumpur and Singapore, where he serves as a founding board member.
