A TREND is emerging among Malaysian banks – since last year, several have made cash calls and more may join the bandwagon. HONG LEONG BANK BHD (HLB) is the latest among financial institutions to make a cash call.
It joins the ranks of PUBLIC BANK BHD (PBB), which completed a fund-raising exercise last year, and RHB Capital Bhd (RHB Cap) that is in the midst of completing a similar exercise. MALAYSIA BUILDING SOCIETY BHD (MBSB) has stated that it is looking at a cash call.
While the main rationale given is that banks need to beef up their capital base for the Basel III requirement, some investment bankers feel that the major shareholders of the banks could actually use this economic downtrend as an excuse to increase their shareholdings in the companies.
While the typical investor may be fretting over the FTSE Bursa Malaysia KL Composite Index being down 10% on a year-to-date basis and the ringgit hitting the RM4.08 mark, most seasoned businessmen would generally take the view that bad times are part and parcel of the business cycle.
So, while waiting for the economy to rebound, some could perhaps be using the cash call route as an opportunity to increase their shareholdings in their companies.
“For the substantial shareholders, bad times give them the opportunity to increase the shareholding in their companies. If the owners are convinced of the fundamentals of the company, this is the time to put more money. If they don’t, who is going to do it?” asks an investment banker.
Another investment banker says that banks generally call for a rights issue as a measure of prudence.
“When times are not so good, the best and most prudent way is to raise funding from shareholders to further beef up the companies’ war chests. All banks that undertake these measures are taking prudent measures to increase shareholders’ funds and reserves,” says Astramina Advisory managing director Wong Muh Rong.
She says that calling for the rights issue is also an opportune time for substantial shareholders to gather insight into which shareholders have confidence in their companies.
“Raising rights issue money in difficult times will invite genuine shareholders who believe in the business, which in the mid to long run is good for the company in building its reserves,” says Wong.
Over the week, HLB announced plans to undertake a renounceable rights issue of new HLB shares to raise gross proceeds of up to RM3bil.
HLB said that the move was part of its capital management strategy to further strengthen its capital position to support the continuous growth of the group.
In HLB’s case, the move is not surprising as HLB’s common equity Tier 1 (CET-1) capital ratio is one of the lowest in the industry, at below 10%. Following the rights issue, HLB’s CET-1 ratio will increase to 11.26%.
The CET-1 is the measurement of a bank’s core equity capital compared with its total risk-weighted assets. This is the measure of a bank’s financial strength.
“In our view, a capital-raising exercise is a necessity for all banks and only a matter of timing for its execution. Hence, upon completion of the capital-raising exercise, it will pave a clearer path for the group’s management to focus on strategies to achieve higher returns on equity (ROE) for its shareholders ahead,” says Kelvin Ong, banking analyst at MIDF Research.
Ong adds that the proposed rights issue will facilitate the build-up of an adequate level of capital buffer in preparation for the forthcoming regulatory capital requirements.
The major shareholders of HLB are Hong Leong Financial Group Bhd and Hong Leong Equities Sdn Bhd, which hold 63.59% and 0.63% stakes, respectively.
Of the RM3bil planned to be raised, RM1.9bil and about RM19mil will come from the two companies.
Both have given their undertakings to subscribe for their portion of the rights shares.
Furthermore, undertaking the rights issue when the market is down also enables the major shareholder to undertake the fund raising at a cheaper price.
“You get to buy the rights at a discounted price. The market will eventually rebound and the stocks will go back to their fundamental valuations,” says the investment banker.
HLB is down 8.01% on a year-to-date basis at its current price of RM12.86. It is also down 14.03% from its 52-week high of RM14.96 on Sept 8 last year. It is now trading at an undemanding forward and trailing price-earnings ratio of 10 times.
In the meantime, the exercise is expected to be fully completed by end-December 2015.
Hence, it will not have an impact on HLB’s financials in financial year 2015 (FY15) but is expected to result in a dilution to the group’s earnings per share (EPS) and ROE for its FY16 ending June 30, 2016.
The first bank to make a cash call was PBB, a well-capitalised bank which had called for an RM4.8bil rights issue last May. This made it the largest cash call among local financial institutions in history.
The RM4.8bil quantum caught the market by surprise because it effectively over-capitalised PBB’s position from its previous standing of being under-capitalised among its peers.
The completion of the rights issue further enhanced PBB’s capital position, and as of June 30, the group’s CET-1 capital ratio, Tier-1 capital ratio and total capital ratio were at healthy levels of 10.7%, 11.9% and 15.4%, respectively.
Further amplifying the scenario was the fact that PBB’s founder and chairman, Tan Sri Teh Hong Piow, who owns 24.08% of the bank, undertook to subscribe his entitlement in full.
Teh pumped in approximately RM1.2bil of his money for the exercise.
This does come as a surprise because Teh, who founded the bank some 48 years ago, has taken a backseat in actively managing the banking group.
Meanwhile, fourth-largest lender RHB Cap announced in April that it will issue new shares through a rights issue of up to RM2.5bil and inject the capital into its main operating entity, RHB Bank.
Following this, the group is expected to see interest savings of RM150mil and tax savings of RM35mil to RM40mil. This will result in an improvement in earnings, on a smaller book value and thus will increase its ROE.
It has been reported that the group’s CET-1 ratio is expected to increase to at least 11% from the current 9%, while EPS is expected to be diluted by between 10% and 30%
Non-bank lender MBSB is also looking to raise RM3bil in a capital-raising exercise. This is part of its plan to grow via the merger and acquisition route, potentially next year.
MBSB has openly said that it wanted to become a full-fledged Islamic bank, and that its preferred method of doing so is by merging with an existing Islamic financial institution. Its chief executive officer Datuk Ahmad Zaini Othman has said the exercise will most likely be a rights issue.
The corporate exercise will be to ready MBSB for discussions of that nature when it crops up some time in the future.
MBSB’s major shareholder is the Employees Provident Fund with a 65.1% stake.
HLB is not the last to embark on a fund-rasing exercise.
“Several other companies, including non-financial institutions, are also looking at fund raising,” says a banker.
This cuts across even plantation companies that have gone on an acquisition trail in the last few years.
“Depressed valuations will entice major shareholders to accept a fund-raising exercise,” says the banker.
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