The press conference lacked the tears and self-abasement seen after some recent Japanese bank failures but management was certainly contrite. “It’s obvious to everyone that we’re not very good at banking,” said Sime Darby chief executive Nik Mohamed. “We’re good at making tyres and owning plantations.”
A few days earlier the Malaysian central bank, Bank Negara, had announced that Sime Darby’s subsidiary, Sime Bank, had lost M$1.8 billion (US$493 million) in six months and needed recapitalizing to the tune of M$1.2 billion. The non-performing loans of the country’s sixth-biggest financial institution stood at 18%.
Sime Darby, Malaysia’s premier conglomerate, took the hit and announced that, as a result of its 60% owned bank’s suicidal performance, it had lost M$1.1 billion between July and December – its first loss in living memory. The psychological blow to corporate Malaysia was huge. Sime Darby is an emotional stock. It was British-owned until 1976 when it fell into patriotic Malay ownership. It became a focal point of Malaysia’s New Economic Policy – a policy that seeks to promote corporate ownership by Malays (Bumiputeras) in a country where the Chinese minority has long dominated the economy. Its controlling shareholder is Permodalan Nasional Berhad (PNB), a Bumiputera unit trust that is the biggest institutional investor in Malaysia.
Sime Darby’s flirtation with financial services began in late 1995 when it bought majority control of United Malayan Banking Corporation, and swiftly changed its name to Sime Bank. The new shareholder promised a new, brighter era for a bank that had gone downhill ever since its sale by Tun Daim Zainuddin (see interview) in 1986.
Sime Darby paid M$1.3 billion for its new bank and upgraded the capital base from M$333 million to M$500 million. An additional 5% of the equity was sold to star banker Ismail Zakaria, formerly at MayBank and Rashid Hussain’s DCB. He was brought in to run the bank and was intent on growing the bank’s business – with the aim of floating it in 1998.
At Sime’s year-end in June 1997 the bank recorded a pre-tax profit of M$449 million, which amounted to 27% of Sime Darby’s profit. But this was on the back of a 66% increase in lending that notched up a loan-to-deposit ratio of over 120%. It turned out that a lot of this lending was to stock market speculators, either through Sime Bank itself or through its brokerage arm, Sime Securities. Such loans accounted for nearly M$1.2 billion, or 22% of the entire loan portfolio. This exceeded the 15% ceiling permitted by the central bank. A single individual was lent nearly M$1 billion by Sime Securities – to prop up his flagging share price.
Once the stock market began to plunge, so too did Sime’s loan book and its collateral.
When asked how it was possible that there were so few controls in place, the senior management said an investigation was underway and no conclusions could yet be drawn. If shoddy management is the conclusion then the blame lies principally with ex-chief executive and minority shareholder Ismail Zakaria – a man who at one stage was shortlisted to be governor of the central bank.
Systemic weakness
However, to lay the blame solely on Ismail misses the point. Sime Darby’s senior management cannot write this off as rogue trading. Loan growth of 66% is pretty hard to hide. And Sime Darby’s chairman, the debonair Tunku Ahmad Yahaya, served as a director of the central bank for 29 years. These are not the mistakes of one man, or even of one management team. As in Japan, they probably point to a systemic weakness in the way loans are made in Malaysia. At the same time that it announced Sime Bank’s problems, Bank Negara came clean that the nation’s second-biggest bank, state-owned Bank Bumiputra, also needed recapitalizing – in its case a M$750 million capital injection was required.
Prime minister Mahathir Mohamad commented defensively in mid-March: “Many people are in trouble not because they are not efficient or they want to cheat. They borrowed and hoped to pay back but because the currency fell they could not do so.”
However the central bank’s response to the Sime crisis was swift. By the very evening that it announced Sime’s problems, it had lined up a white knight. Enter Tan Sri Rashid Hussain, majority owner of Malaysia’s most dynamic financial services group, RHB Bank.
Once just a stockbroker, Rashid has grown his securities firm – by acquisition – into a universal banking group. The key acquisition was in late 1996 when he bought Kwong Yik Bank, an institution with a large Chinese retail base, and merged it with DCB Bank, a traditional corporate bank. The result was RHB Bank, which became Malaysia’s third-largest financial institution.
Rashid was already embroiled in merger talks with another banking group, Commerce Asset, during February but was getting dispirited. “On Saturday February 28,” says Rashid, “I decided I had better start looking around, and I called up the central bank and said if you’re looking for a quick fix in this merger with Commerce you’re not going to get it. The central bank then mentioned Sime Bank. My immediate reaction was: ‘keep me away from it.’ However, the central bank then gave me Sime’s figures and asked me to have a think about it.
“I worked the whole of Saturday and Sunday. On Monday I approached the central bank and said I will consider it on these terms. It then put us in touch with Sime Darby.”
The contrast with the tortuous Commerce Asset negotiations was refreshing. “This time round there was a big difference,” says Rashid. “Sime Darby says: ‘take it now, sign the dotted line and it’s yours.’ We say, wait a minute, am I missing something here?” He then went public with his intentions late on Tuesday evening. The surprise tactic worked. Everyone was floored by Rashid’s change of dance partner – including almost every member of his own corporate-finance team that had to read the news in the newspaper the next morning.
Bouncing back from the backlash
The acquisition of Sime Bank will create a banking group with around M$68 billion of assets and 200 branches. Only state-owned MayBank is bigger. For Rashid, the merger puts to rest a rumour that he was out of favour. As one of Malaysia’s more international oriented capitalists he had suffered something of a backlash when the currency was devalued and the stock market plummeted – from a high of 1,110 to a low of 477. At one stage he was accused of shorting the market.
“I could have shorted the market,” he says “but I didn’t.” One of his units, however, was lending stock, perfectly legally. “We have a stock borrowing and lending licence. The Securities Commission encouraged us to apply for one. The unit was successful and we were lending stock in accordance with the law.”
What of the rumours? “Someone like myself creates a lot of enemies in this town and a lot of people would like to see me down. They capitalized on it. Some people thought the prime minister got involved. It’s not so. And certainly the [untrue] story that I was arrested under the Internal Security Act did a lot of injustice to this country.”
His surprise coup with Sime Bank, however, should not be allowed to mask the difficulties he embroiled himself in just a few weeks earlier. His first takeover target was Commerce Asset, the country’s fifth-biggest financial group, and also one of the best connected.
This deal – which was on, then off, then on again – was eagerly watched by analysts trying to figure out whose connections would win through.
The Commerce Asset group owns Bank of Commerce, and Commerce International Merchant Bankers. Its most active shareholder is Renong, the infrastructure group which is believed to have strong links to ruling political party Umno. Renong describes Commerce Asset in its annual report as its “financial services arm”.
Top Bumiputera tycoon Halim Saad owns 23% of Renong. The telecoms-to-buses-to-construction conglomerate is struggling with M$4.12 billion of debt and reported a loss of M$331 million in the second half of 1997.
Halim is a protégé of former finance minister Daim with whom he worked at Peremba, a Bumiputera property company. This fact has led Malaysia-watchers to label Renong a “Daim company”, based on what are believed to be its strong affiliations with him.
For the record, Daim gives short shrift to such views even though they are widespread. He told Euromoney: “I don’t understand why they always say this. When I was in the government they used to say this is a Daim company. It is always like that till the day I retire. That is why I have never responded – if that is the trash they wish to write.”
Whatever the case, this was the organization Rashid took on when he decided to suggest a merger with Commerce Asset and pull Renong’s bank out of its clutches.
However, Rashid is very well connected too. A Singapore-born Malay who is married to Sue Kuok – the daughter of Malaysian-born Chinese tycoon Robert Kuok – Rashid’s connections go right to the top. At Umno’s 51st anniversary bash last year he was photographed by the press in formal baju Melayu in the presence of Mahathir and deputy prime minister Anwar Ibrahim. Such press photos tend to count for a lot in Malaysia.
UK–educated and urbane, he began his career at Strauss Turnbull before returning to Malaysia as an investment adviser at Bumiputera Merchant Bankers in 1975. He was almost immediately seconded to NM Rothschild where, as he puts it, he “cut his teeth” working with the British merchant bank on the hostile takeover of Sime Darby by government Bumiputera group Pernas. As already mentioned, this was to be a cornerstone transaction of Malaysia’s New Economic Policy and helped Rashid get noticed.
An early shareholder in his business, RHB Securities, was Tan Sri Wan Azmi Wan Hamzah, a close associate of Daim – who like Halim, had worked for Daim at Peremba. Rashid became the stockbroker of choice for Bumiputera tycoons, and benefited as Daim encouraged financial services to return from Singapore to Kuala Lumpur.
From media group to conglomerate
A new chapter began with the Kwong Yik merger, when 27% of Rashid’s new group was bought by a powerful new shareholder, Malaysian Resources Corp Berhad, better known as MRCB. Rashid does not deny that MRCB has “political clout”.
MRCB came into being in 1992 when four senior editors and executives of the New Straits Times Group launched a management buy-out of the country’s flagship newspaper and top television station TV3. Before the buy-out, these assets had formed part of Renong. Just as people speak of Renong as a Daim-affiliated company, MRCB is referred to as having strong affiliations with deputy prime minister and finance minister Anwar Ibrahim.
Over the coming years, the media-bias of MRCB was diluted as the company’s corporate profile became ever more similar to Renong’s. It took a controlling interest in power project Malakoff, was awarded a cellular telephone licence, and is building the Seri-Iskandar Lumut Expressway. Group turnover surged from M$67 million in 1992 to M$908 million last year.
Nor is Renong the only key shareholder in Commerce Asset. When the buy-out took place in 1992, MRCB got a 20% chunk of it too. The central bank and finance minister Anwar Ibrahim have been encouraging bank mergers to strengthen confidence in the sector. “The deal had the blessing of the central bank and the finance minister,” says Rashid. “I wouldn’t have dreamed of doing the deal otherwise.” It had the blessing of MRCB too. MRCB boss Dato Khalid Hj Ahmad sits on RHB’s board, and so had advance knowledge of Rashid’s raid.
Renong – which owns 17% of Commerce – was less keen and what followed was something of a stalemate as two immovable interest groups went head to head.
Rashid announced his merger intentions on February 5. Then just over a week later, on February 13, the talks were called off. Commerce Asset and Renong sources complained to the media in a press release that Rashid’s proposals didn’t maximize shareholder value. In a separate release the next day, RHB stated that Commerce Asset withdrew from the merger plan after agreeing to a deal the day before.
Then on February 20 Commerce Asset said it was “agreeable to recommencing negotiations”. This time, however, the talks would centre on just the sale of Commerce Asset’s commercial bank, Bank of Commerce. Later that week Commerce Asset held a press conference to say that it was also talking to Bank Bumiputra, the country’s second-biggest bank.
The game of footsie finally came to a close on March 2 when RHB announced its intention to buy the floundering Sime Bank for a price of M$852 million instead. Subsequently Commerce Asset announced a share swap with Mbf Finance, which has 153 branches and a predominantly Chinese clientele. This will add synergies to Commerce’s 53 branches and strong Bumiputera corporate relationships.
One reason Commerce cited for rejecting RHB was the similarity of their corporate profiles. It was able to make its case at the highest level – and not only via Renong. The deputy chief executive of Commerce International Merchant Bankers is Nazir Razak. He is the son of Malaysia’s second prime minister, Abdul Razak Hussein – the founder of the New Economic Policy.
There was another, even thornier issue – cash. Commerce Asset is quite a rarity in the Malaysian banking scene since it is sitting on about M$1.2 billion of cash from a rights issue last year. Merrill Lynch estimates that RHB, on the other hand, has about M$3 billion of debt, most of it from the Kwong Yik acquisition. Everyone wanted to unlock this cash. Renong has M$4 billion of debt.
MRCB also has debt. In its case, the most pressing debt is the money it borrowed to buy into Rashid’s banking empire. It bought 27% of RHB using a $250 million bridging loan. This came due in December, and in ringgit terms looks onerous given the currency has fallen 45% against the dollar since the loan was made.
No matter which way it was cut, no-one seemed satisfied with his share of the cash pile. However, since the ministry of finance and the central bank had egged Rashid into action, the Sime Bank deal may have offered a face- saving formula for all parties concerned. (Indeed, Commerce would have been a more logical partner for Sime given that it has M$1.2 billion of cash, which is exactly the same amount that Sime requires to recapitalize its operation.)
Rashid prefers to sum up the deal’s failure as more a clash of personalities than anything else. He says he quickly realized an unfriendly merger would drag on and on.
This being a Malaysian bank merger, the Sime deal turned out to be political too. About 30% of Sime Bank is owned by an investment cooperative called Koperasi Usaha Bersatsu (better known as KUB) owned by members of the ruling party, Umno. KUB describes its activities as ranging from telecommunications to energy to education to hotels to trading and manufacturing. In reality 60% of its earnings came from Sime Bank.
When a bank fails you would normally write off the equity. In KUB’s case writing off its M$750 million investment would have rendered it almost insolvent given it has shareholder funds of M$841 million and debts of around M$500 million. It was clear that while Sime Darby could afford to take a hit on Sime Bank, KUB couldn’t – either financially or politically.
The deal reportedly stalled when KUB made it clear that some quid pro quo was necessary if it was to agree to Rashid’s entry. As luck would have it, one emerged. Bumiputera investment fund PNB has agreed to sell it a 32% stake in Malaysia Mining Corp, a profitable company founded 22 years ago. This acquisition took place at just above market price – which left many pleasantly surprised.
Less transparent is the way in which Sime Darby and KUB are carving up the spoils from the RHB deal. The initial indications were that both are to be given stock in a new company, RHB Holdings. But KUB will get about six times as big a stake in the new company as Sime Darby in spite of the fact that it only owned 30% of Sime Bank, whereas Sime Darby owned 60%.
The apparent reason for this is that Sime Darby had signed an option with KUB to buy its stake in February 1997 at M$8 a share. The value of the option – which was never made public – explains the discrepancy in their respective share allocations. It is thought KUB will use the proceeds of this stake to fund its acquisition of Malaysia Mining Corp.
When Euromoney went to press Rashid’s own plans had yet to be announced. By Friday March 27 Rashid had still not revealed how he planned to finance the transaction, even though he had initially said he would announce details of this on the previous Friday – and even though the Kuala Lumpur Stock Exchange had set a deadline of
March 27.
Rashid is in no position to take Sime with some of its less desirable assets intact. Most analysts suspect that the delay in sealing the deal reflects a hard-nosed negotiation with the government over getting rid of the rubbish on the balance sheet. The government wants a stronger banking group to emerge, but is equally sensitive to charges of bailing out its banking sector.
