Rip-roaring Malaysia, home of high growth, big capital markets and buildings tall enough to break records, has now decided that big is beautiful for banks, too. Merger and takeover fever has swept the stock market and the rumour mill is working overtime.
Already new financial supermarkets are taking shape, involving some of the biggest names in Malaysian business. The buzz words are global competition and regional expansion. But there’s also an emphasis on prudent management, capital adequacy and grasping the concept of risk.
There are good reasons for caution. Malaysians remember only too well what happened the last time the banking sector got carried away. In 1983, the so-called Carrian affair, involving $1 billion in fraud losses at the Hong Kong subsidiary of Bank Bumiputra, Malaysia’s second-largest bank, besmirched the country’s reputation abroad. Two years later a severe local recession left banks with a massive overhang of property-related bad debt that almost felled the whole sector.
Bank Negara, Malaysia’s central bank, is determined that nothing like it will ever happen again. But it is also keen that the reconstructed banking sector, now recovered from the 1980s’ debacle, will become big enough to compete when foreign banks are allowed to expand domestically under new global free trade rules.
A financial supermarket, Malaysian style, contains not only a traditional grocery section a commercial bank but also a delicatessen offering other services broking, investment banking, insurance, leasing, property trust management, industrial and housing finance, consumer loans and credit cards.
Malayan Banking (Maybank) is the only existing institution already sufficiently large, multifunctional and well equipped to expand regionally. Officials at Bank Negara are eyeing a range of other financial companies from which to construct the new financial supermarkets that regional ambitions and foreign competition demand.
Pawnbroker banks
Two mergers and reconstructions are already under way, one involving the Sime Darby Group and the other a merger of Rashid Hussain Berhad, Malaysia’s top broker, and DCB Holdings, Malaysia’s fifth-largest commercial bank. A third group, Public Bank, already provides an array of financial services and with development is probably big enough to go it alone.
At least two other financial supermarkets may yet emerge as Malaysia’s government tries to follow neighbouring Singapore’s big four banks into regional markets such as Indochina, Indonesia and the Philippines.
Moves to reorganize the sector started when Bank Negara introduced new rules in 1994 establishing two tiers of banks. Those in tier one were required to have a minimum capital base of M$500 million (US$197 million) and were given the go-ahead to expand. Those in tier two banks with less capital were restricted in their operations. A revision to the formula for calculating lending rates issued in late 1995 also benefited big, efficient, well-managed banks and penalized small ones.
The government view was clear: consolidation and rationalization was the way to go and mergers of smaller banks were strongly encouraged. But few took the hint. Until late in 1995, an economy 20% the size of Australia’s still had 24 local banks compared with Australia’s four.
“Many are very small family-run Chinese concerns, not much above pawnbroker level,” says John Carruthers, the Barclays representative in Malaysia. “The banking sector doesn’t measure up to the progress made in other parts of the Malaysian economy.”
Fragmentation and uncompetitiveness has meant that 24% of outstanding loans are on the books of big foreign banks such as HSBC, Standard Chartered, Citibank and the Development Bank of Singapore, all licensed since the days of colonial rule. Malaysian officials believe that when more are admitted under global free-trade liberalization, domestic banks could be rapidly overwhelmed by foreign competitors unless the local sector is strengthened.
The first to respond to the government’s nurturing of bigger banks was Sime Darby, the largest Malaysian conglomerate, with sales of more than M$9 billion a year. It has interests in plantations and tyre-making, heavy equipment and vehicle sales, property and insurance. It is active in Australia, Hong Kong, the Philippines and Singapore as well as Malaysia.
In late 1995 Sime Darby paid M$1.3 billion for a 60% stake in United Malaysian Banking Corp (UMBC), Malaysia’s fourth-largest bank with a capital base of M$333 million. It has several foreign branches, a successful brokerage in Kuala Lumpur and a finance company. The conglomerate quickly wooed Ismail Zakaria, a former star banker at DCB and Maybank, to run a renamed operation.
Relaunched by finance minister Anwar Ibrahim last December, the newly named Sime Bank announced plans to upgrade its capital base to M$500 million, make an initial public offer of shares next year, open 20 more branches and expand into regional business, where it will be helped by the conglomerate’s clients and connections. By 1998, Sime Bank is expected to contribute almost 30% of Sime Darby’s total profit.
The group has just started talks about a further merger: with Oriental Bank, currently controlled by Malaysian Industrial Development Finance (MIDF), the largest industrial financing company in Malaysia. Oriental Bank is Malaysia’s thirteenth-largest commercial bank. It is active in the small and medium-sized business sector, earned M$139 million in 1995 and has been valued at M$1 billion.
Investors loved Sime Darby’s strategy; its stock has jumped 55% since it purchased the bank 15 months ago. But they were even more impressed when one of the biggest names in Malaysian finance, Rashid Hussain, strode onto the merger stage last November to set up a deal involving Kwong Yik Bank and DCB Bank.
Quietly spoken, fast-talking, energetic and professional, Hussain is the whizz kid of the Malaysian financial sector, boasting some of the best connections in the country. He is close to former finance minister and prime ministerial adviser Daim Zainuddin and is married to Sue Kuok, daughter of Robert Kuok, Malaysia’s richest industrialist.
He is also chairman of the executive committee at Khazanah, a two-year old state-owned body that invests up to M$40 billion of Malaysia’s assets. Competitors view this appointment with envy, assuming that Hussain is privy to advance information on government strategies, such as privatizations, which could put him a step ahead of the market.
But bankers and brokers say Hussain’s professionalism has been just as important to his rise as his connections. His Rashid Hussain Berhad (RHB) brokerage, established in 1983, is the most prominent regional house from Malaysia and is well regarded in Asia with branches in most countries. The massive growth of regional stock markets helped RHB brokerage’s pre-tax profits rocket to M$364 million in 1995, twice as much as a couple of years previously.
“Rashid Hussain has all the deals locked up in Malaysia,” says a foreign broker. “There doesn’t seem to be anyone else as good as him. Certainly he’s very able, talented and respected.”
His brokerage is not the largest in Malaysia, as Hussain has concentrated on developing institutional clients rather than the hyperactive retail investors who play the Kuala Lumpur Stock Exchange’s second board. He has also concentrated on investment banking, where his corporate finance team has shown itself skilled at structuring deals, working with foreign partners and managing distribution.
In the complex new takeover, which is awaiting regulatory approval, RHB will hold a controlling stake in an expanded company with M$35 billion in assets the third-largest banking group in the country. Under the deal, RHB will buy a 75% stake in Kwong Yik Bank, currently controlled by Maybank, for M$2.2 billion, paying a 27% premium on Kwong Yik’s share price.
Kwong Yik Bank is to be merged with DCB Bank, in which RHB already has a 20% stake. It will then be delisted. RHB will inject M$5.8 billion in assets, including its brokerage, asset management and unit trust businesses as well as some property, into DCB. DCB will issue new shares in its holding company to RHB, giving Hussain a 54% stake. The two banks’ finance companies will also be merged.
Malaysian Resources Corp (MRCB), a property and publishing company controlled by the United Malays National Organization (UMNO), Malaysia’s ruling political party, will pay M$490 million for new shares in RHB amounting to a 27% stake.
MRCB, which earned M$123 billion in pre-tax profit in 1995, is a politically influential partner that has been awarded a number of privatization projects, including a M$9 billion new township, a commercial centre and a rail terminal in Kuala Lumpur, the upgrading of the electricity transmission grid and a M$500 million expressway construction project.
The company also controls New Straits Times press, which publishes Malaysia’s leading newspaper, and a television station. Its property interests are likely to fit well with Rashid Hussain’s Vision City project in Kuala Lumpur, which involves the construction by 1999 of four new office towers worth M$1.2 billion.
Analysts believe the deal is of benefit to all the players, broadening DCB Bank’s services with the addition of Kwong Yik Bank, which has a large customer base in the Klang Valley near Kuala Lumpur, home to the Malaysian middle class. Kwong Yik specializes in retail banking, while DCB is strong in corporate and investment banking but had been planning to expand its retail customer base.
Setting the benchmark
Both banks have a Chinese management background Kwong Yik was Chinese-owned before Maybank bought into it and DCB was formerly owned by a company linked to the Chinese players in UMNO. Analysts believe the merger will present few cultural problems.
Rashid Hussein Securities is now likely to work much more closely with DCB Sakura, DCB’s investment bank, boosting its chances of winning good regional business.
In addition RHB wins financial supermarket status, and its influential partner MCRB will boost its position in the property market. Brokers believe major new deals may come the group’s way under Malaysia’s policy of boosting non-Chinese entrepreneurs via its privatization programme. A leading role in the new Putrajaya city is one possibility.
The high price paid to Maybank for Kwong Yik Bank has set a benchmark for mergers and raised most banks’ share prices, at the same time putting increased pressure on medium-sized banks to find partners. Maybank itself still remains easily the biggest financial supermarket, with assets after the Kwong Yik sale of M$84 billion, and now has the cash to pursue its regional aspirations. In December it emerged as the sole bidder for the Philippine National Bank’s 60% stake in Philippine bank PNB-Republic, up for sale for a minimum of Ps800 million ($30 million).
The market loved the RHB deal. After a month’s suspension while details were being thrashed out, the shares were requoted on the Kuala Lumpur Stock Exchange in early December. Rashid Hussain shares jumped 20% and Maybank was up 11%.
BZW Asia forecasts that after the restructuring RHB’s 1996 pre-tax earnings will increase to M$722 million from original estimates of M$391 million, and that DCB’s pre-tax profit for 1997 will rise to M$745 million from M$401 million. Maybank is not expected to lose from the sale of Kwong Yik Bank, since it can achieve better returns by lending the cash on the market.
To Hussain, who says he spent months studying the re-engineering of banks, falls the task of integrating the various arms of his new conglomerate. He has already announced that DCB’s investment bank is to have its capital upgraded to M$500m and that it will engage in regional business. Yvonne Chia, DCB bank’s chief executive, is to stay on and run the new merged bank, where business and branches are expected to be complementary.
Having digested the details of the Rashid Hussain deal, analysts are now casting their nets in search of other candidates for mergers and restructuring. One big group, the Chinese-owned Public Bank, is likely to be ruled out on the grounds that it is already almost a complete financial supermarket, big enough to stand on its own. Controlled by Teh Hong Piow, Public Bank was the third-largest bank until RHB was set up. Public Bank and its subsidiary Public Finance have nearly 300 branches between them in Malaysia and the bank has already expanded regionally. Total assets of the two companies were over M$40 billion in 1995.
Public Bank has a strong balance sheet and conservative management, with a low loan to deposit ratio of only 61%. Loan growth, though, is now expanding rapidly and the bank’s pre-tax profit is expected to have risen to M$750 million in 1996 from M$595 million in 1995. The finance company mainly makes consumer-credit loans but is expanding mortgages and corporate loans. Public Finance is forecast to earn M$160 million in 1996, up from M$134 million in 1995. The group lacks an investment bank and an insurance arm, but owns a brokerage.
M&A speculation centres rather on a number of state-controlled and bumiputra (ethnic Malay)-owned groups of which the largest is Bank Bumiputra, the second-largest bank after Maybank and a candidate for privatization.
The future of Bank Bumiputra is probably one of the most politically sensitive and widely watched issues in Malaysia. Owned by the finance ministry, the bank has been bailed out twice, most controversially after the Carrian affair, when fraud and mismanagement spread their tentacles from Kuala Lumpur to Hong Kong and on to London.
Last year George Tan, the head of Carrian, a Hong Kong firm that collapsed in 1983 with more than HK$8 billion (US$1 billion) in debt, was jailed in Hong Kong for three years after pleading guilty to two counts of conspiracy to defraud. He had been free on bail for 13 years while a massive legal battle was fought out.
Carrian had received more than US$1 billion in loans from Bumiputra Malaysia Finance, the Hong Kong subsidiary of Bank Bumiputra, then run by Lorrain Osman. Osman was charged with more than 30 counts of fraud and corruption. He fled to the UK and waged a seven-year struggle against extradition that reached the UK’s final court of appeal, the House of Lords, and the European Court of Human Rights before he was finally turned over to the Hong Kong authorities in 1992. In a plea bargain, most charges against him were dropped and he served only a few months in jail the following year.
Two Bank Bumiputra executives were also charged and sentenced to five and 10 years, while another Malaysian was found guilty of murdering a Bank Bumiputra auditor sent to Hong Kong to investigate the fraud. Another auditor investigating the case was found dead in a swimming pool with a manhole cover tied to his neck.
The debacle, widely publicized in Asia and the UK, cast a pall over the Malaysian banking sector that has still not wholly lifted. “The memory of a state bank going bust still lingers,” says a broker.
But government attitudes to bail-outs for state banks have definitely hardened and the administration has said that it has no intention of bailing out any more banks. Observers add that as the economy becomes deeper and more sophisticated, the concept of “doing national service” making loans for political rather than economic reasons is becoming less of a problem.
Analysts no longer believe that political connections automatically imply extra risk, noting that Maybank, controlled by national equity corporation Permodalan Nasional (PNB), lent less than M$200 million to Perwaja, a steelmaker currently under investigation following revelations that the company is insolvent. Furthermore, all Maybank’s loans are fully provisioned, showing that the bank operates according to market principles.
PNB, which shelters two large unit trusts, is a key shareholder in the financial sector. It holds a 42% stake in Maybank, a 25% stake in Sime Darby, and large stakes in several smaller financial firms. PNB’s funds and investments have been rigidly controlled for nearly 20 years by 78-year-old Ismail Mohammed Ali, who is now to hand over to Ahmad Sarji Abdul Hamid, the former chief secretary to the government. The change could signal a more flexible investment policy that may contribute to the shaping of further financial supermarkets. Already PNB has agreed to the beginning of talks between the new Sime Bank and Oriental Bank, a subsidiary of MIDF, in which PNB has a 46% controlling stake.
MIDF has assets of nearly M$10 billion and also controls an investment bank, an industrial estates development company and a finance company. It is negotiating to buy an insurance company. It made pre-tax profits of M$137 million in 1995 and is widely regarded as a merger candidate.
Another attractive PNB affiliate is Seacorp, which runs a discount house and a finance company. In partnership with Schroders, it also runs Malaysia’s fastest-growing fund management firm. Seacorp is forecast to have earned M$40 million in pre-tax profit in 1996.
Movement is also afoot at the Arab Malaysian Group. Chairman Azman Hashim has announced a restructuring of the group in the face of the current merger activity. Arab Malaysian owns the country’s largest investment bank, Arab Malaysian Merchant Bank (AMMB), which contributed 40% of the income of the group’s holding company in 1995. It also has a finance company, leasing and insurance arms, a stockbroker, property trusts and a small commercial bank. In 1996 AMMB had total assets of M$30 billion and pre-tax profits of M$635 million. AMMB will need to expand in the commercial banking arena to acquire full supermarket status.
Analysts are also eyeing Affin, the financial services holding company of the Malaysian army’s pension fund. Affin owns a commercial bank, a merchant bank, a finance company and an insurance company. It had assets of M$12 billion in 1995 and pre-tax profits of M$258 million. Perwira Affin Bank has been expanding lending sharply and expects to achieve tier one status soon.
Any of these smaller groups might make a good match for Bank Bumiputra. But much of the merger attention is focused on Commerce Asset Holdings as the company most likely to to succeed in grasping the colossus.
Commerce Asset Holdings is itself the product of a merger between Bank of Commerce and United Asian Bank six years ago, a merger that appears to have been astutely conducted. The group is also involved in merchant banking, stockbroking, property trust management and leasing. Its pre-tax profit growth is averaging over 20% a year, reaching M$331 million in 1995. Total assets are expected to reach M$20 billion this year.
Commerce Asset is regarded as innovative and well managed but needs to boost its size. It may also seek to add an insurance arm. In commercial banking it wants to boost its weak retail business. In December it announced that it plans to raise M$1.2 billion. Flush with cash and with a strong capital base it would be well placed for an acquisition.
The matchmaker in charge of Bank Bumiputra’s future is likely to be éminence gris and privatization supremo Daim Zainuddin, who is also close to the owners of Commerce Asset Holdings. But bankers are still not ruling out a possible move by Rashid Hussain to gain control of what the dealmaker himself describes as a “political bank”.
Singaporean players
Foreign-owned banks have not been excluded from merger and takeover activity. New banking licences have been frozen for 10 years and already a number of smaller foreign banks have sold stakes or even outright control to Malaysian firms.
AMMB Holdings has bought Security Pacific Bank’s single branch for M$285 million while Phileo Allied paid M$75 million for a one-branch Singapore bank in Sabah, West Malaysia. Bank of Nova Scotia is discussing the sale of a 51% stake to Kumpulan Fima, a group involved in stockbroking, property, manufacturing and storage. Late last year Bank Indosuez sold the remaining 30% stake in its Malaysian operations to partner Multi Purpose Holdings for M$357 million.
But the main players on the expansion side are the Singaporean banks that have had a presence in Malaysia since the days of the Singapore-Malaya federation. Still under negotiation is a planned merger between the local Pacific Bank and Singapore’s Oversea Chinese Banking Corporation in Malaysia. This combination would produce Malaysia’s seventh-largest commercial bank, with assets of M$19 billion. Pacific already owns an insurance company and is planning to acquire Great Eastern Life Malaysia, the largest life company. Pacific Bank has tier one status and is growing fast, recently having opened its 60th branch, with six more planned.
Singapore’s United Overseas Bank (UOB) is also likely to be a bigger player following the merger of its Malaysian operations with Chung Khiaw Bank. The new entity, with assets of M$10 billion under 100% UOB control, will meet tier one requirements and will become the third-largest foreign bank in Malaysia in terms of shareholder funds.
This will enable UOB to expand into such areas as securities lending, derivatives and the issue of negotiable instruments of deposit as well as to take part in big syndicated loan deals. Malaysia’s ambitious infrastructure plans make this sector lucrative.
UOB has tied up with the armed forces pension fund, which already controls Affin. The two will establish a joint-venture stockbroker to add to UOB’s existing asset-management firm. UOB is already active in banking and broking in most other countries in Southeast Asia.
Having prompted the commercial and investment banks to prepare themselves for a regional role, Bank Negara has now turned its attention to finance companies, which will now also be subject to tiering. If they wish to remain eligible to trade in the interbank market, they will be required by January 1998 to raise their minimum capital to M$350 million from M$300 million, and by 1999 to M$600 million,.
“Size has become an increasingly important factor to gain competitiveness,” says central bank governor Ahmad Mohamad Don. “Among the interbank money-market players I note that a number of institutions are still undercapitalized.”
Only three Malaysian finance companies would currently qualify for tier one status Public Finance, Maybank Finance (associated with Maybank) and Hong Leong Finance, associated with Hong Leong Bank. Those denied access to cheap liquid funds in the interbank market will be forced to rely on their own deposits alone, a major constraint.
Brokerage firms may be the next to feel the heat. The government has already raised the limit on foreign stakes in domestic stockbrokers from 30% to 49%. Currently foreign brokers are not allowed seats on the Kuala Lumpur Stock Exchange. Malaysia has more than 50 local brokers, mostly small and involved in the active local retail market.
Analysts give high marks to the central bank for its progress so far in promoting consolidation. To ensure good fits it has looked at merger proposals from the point of view of potential business synergy, asset compatibility and the personality of shareholders as well as size and variety of activities.
“Bank Negara is playing an important role,” says Teck On, banking analyst at Baring Securities. “In the past few years banks have been very profitable, due to the country’s economic growth, the expanded capital market and strong demand for credit. But they are still weak in many areas. It’s good that past lessons are not being forgotten.
