Tricky proposition for Khazanah in CIMB

Raja Shahreen Raja Othman, who is currently the CEO of Selangor

AFTER Khazanah Nasional Bhd’s partial divestment in IHH Healthcare Bhd, there are at least six locally-listed companies which could see a reduction in shareholding by the sovereign wealth fund (SWF).

The fund owns substantial stakes in some of Malaysia’s largest companies, including banking group CIMB Group Holdings Bhd, Axiata Group Bhd, UEM Sunrise Bhd and UEM Edgenta Bhd.

These companies were previously core holdings but have now been placed under the fund’s “commercial” pool of assets.

Put in a nutshell, the commercial pool of assets are up for divestment for the right price.

This is evident from Khazanah managing director Datuk Shahril Ridza Ridzuan’s recent media interview where he envisaged 70% of the fund’s assets being placed in the commercial basket.

He has indicated that it would no longer look to hold onto its large stakes in these companies, feeling more comfortable in whittling them down when opportunities arise.

The remaining 30% of its assets would be companies that have “strategic” roles such as Telekom Malaysia Bhd, Tenaga Nasional Bhd, Malaysia Airports Holdings Bhd and Malaysia Airlines Bhd.

In November last year, Khazanah sold a 16% stake in IHH to Japan’s Mitsui & Co Ltd for RM6 per share in a deal valued at RM8.42bil. That transaction effectively kicked off Khazanah’s divestment strategy because IHH was previously considered a core holding for the SWF.

After the sale, Khazanah still holds 26% in the Asian hospital group but no longer drives the business, leaving that role to Mitsui.

Among assets potentially up for sale, CIMB poses a delicate challenge for Khazanah compared to others.

“Reducing a stake in CIMB is not so straightforward for Khazanah, unlike IHH.

“Being a bank, it is highly regulated and any proposed corporate exercise would need the central bank’s nod,” says one analyst.

Khazanah owns 26.8% in CIMB – the country’s second-largest banking group by assets.

For starters, there are not many foreign funds keen on taking a minority stake in a bank due to the compliance cost. Under the new standards for financial institutions, banks need to provide for capital even if they hold minority stakes.

“The new banking standards are not conducive for investment stakes. This contributes to why banks rarely attract foreign interest these days,” says an investment banker.

Towards this end, Malaysia has not seen the entry of a foreign bank taking up a strategic stake in a local bank since 2008 when Abu Dhabi Commercial Bank (ADCB) acquired a 25% stake in RHB Bank Bhd. ADCB sold the block to Aabar Investments PJS, which had trimmed its stake to less than 18% and is looking to exit the bank.

Australia and New Zealand Banking Group Ltd bought into AMMB Holdings Bhd in 2007 and has been looking to sell its block for more than two years now. Hong Kong’s Primus Pacific Partners acquired a stake in EON Capital Bhd in 2007 but was forced out in an acrimonious takeover by Hong Leong Bank.

Foreign parties can own up to 20% in a commercial bank and the stake can be higher if they have approvals from Bank Negara. But the central bank is stringent in ensuring that banks comply to the shareholding requirements under the Financial Services Act.

Secondly, returns in banking are not as great as before.

Banks’ return on equity (RoE), which is a measure of profitability to shareholders, has been on a declining trend since the global financial crisis of 2008/2009.

In the aftermath of the global financial crisis, banks were required to increase their capital to ensure that they have sufficient buffers in the event of another financial crisis. But a consequence of this was the lowering of the banks’ RoE, not only for international banks but regional ones as well.

“The lower RoE is among the reasons why banks tend to trade at less than one times book value,” points out an analyst.

Against this backdrop, some say paring down a stake in CIMB is a tricky proposition for its major shareholder, Khazanah.

One option the fund could explore is a merger with a local financial institution.

There has been much talk of a banking sector consolidation, but recent potential deals have mostly collapsed.

In 2014, CIMB had proposed a three-way merger with RHB Bank and Malaysia Building Society Bhd (MBSB).

That deal was called off six months down the road. Reasons given were unfavourable economic conditions and the inability to “arrive at a value-creating transaction for all stakeholders”.

Since then, MBSB has gone on to merge with Asian Finance Bank Bhd in a deal that gave it the licence to become a full-fledged Islamic bank.

Could a CIMB-RHB merger be revisited? Or maybe CIMB could explore a potential deal with a smaller rival like Affin Bank Bhd, which some reckon needs to be involved in a merger to unlock its value.

Interestingly, the share prices of CIMB and RHB have been on a slight uptrend this month.

This could also be due to the overall market’s performance, or driven by positive sentiment after smaller peer AMMB Holdings posted positive results.

However, some insiders reckon that given the latest development in the banking sector, the possibility of CIMB and RHB revisiting a merger could be generating interest in the two government-linked stocks.

RHB, which is the fourth-largest bank by assets, is controlled by the Employees Provident Fund (EPF), which has a 40.7% interest.

A merger between the two would have a combined asset size of about RM760bil. This would strengthen both banks’ position over the current third-largest bank, Public Bank Bhd, at RM419bil. But it would still not be big enough to dislodge giant Malayan Banking Bhd, which has an asset size of RM789bil.

In terms of valuation, CIMB is trading at a price to book of 1.06 times, while RHB is at 0.96 times based on yesterday’s closing price.

The EPF is also a shareholder in CIMB, holding 14%, while Permodalan Nasional Bhd has 11.8% and Retirement Fund Inc owns 7.2%.

At RHB, its other major shareholders are Aabar with 17.8% and tycoon Tan Sri Ong Leong Huat, who has 10.1%.

These parties could be the kingmakers in any potential merger involving RHB.

Business-wise, CIMB and RHB have strengths in almost the same areas, which is institutional and wholesale banking.

What additional value a merger would bring to the table is something that the dealmakers would have to come up with, if indeed there is a merger.

Nevertheless, it is an interesting proposition that is already being talked about in corporate circles.