PETALING JAYA: Reports that banking magnate Tan Sri Quek Leng Chan is mulling a stake sale in Hong Leong Bank Bhd (HLB) has spurred speculation of a new round of banking mergers and acquisitions (M&As) in the Malaysian market.
While recent banking M&As dating back to a few years ago failed to take off, this time around new elements are at play which could drive the expected consolidation.
For one, Malaysia now has five new banking players in the form of parties holding digital banking licences. And among those parties is a consortium led by Grab Holdings Ltd – a global brand with seemingly deep pockets that may be needed if indeed the tech giant is keen to buy a slice of Malaysian banks.
However, Malaysian banks are not cheap. HLB’s shares, for example, trade at a 1.5 time multiple of its book value – the second most expensive bank after Public Bank Bhd at 1.9 times.
Quek owns 62% of HLB via Hong Leong Financial Bhd. At yesterday’s close, HLB’s market capitalisation stood at RM45.2bil.
Grab, which is listed in the United States with a market capitalisation of some US$14.3bil (RM63.72bil), had already earlier been speculated to be keen on a slice of AMMB Holdings Bhd (AmBank), another bank which has long been said to be for sale.
Both HLB and AmBank, along with Public Bank, are the remaining banks in the Malaysian market that have yet to fully institutionalise their shareholding base.
Under the Financial Service Act 2013 (FSA), individual shareholders are not allowed to hold more than 10% stake in any local financial institutions.
However, under the “grandfather rule”, Bank Negara has exempted the likes of Quek, Public Bank’s Tan Sri Teh Hong Piow and Tan Sri Azman Hashim of AmBank to pare down their respective stakes to 10% or below.
What could be driving banking M&As among these banks is the uncertainty if the “grandfather rule” will be allowed to be passed down to the second generation of those bankers, considering their age. Both Quek and Azman are in the 80-age group, while Teh is 92.
UOB Kay Hian (UOBKH) Research said that although no deadline was set by Bank Negara as to when the “grandfather rule” will end, there were questions arising as to whether it will apply to the second generation if and when they were to take over the reins.
While this could be a factor, Rakuten Trade head of research Kenny Yee said competition for local banks will increase with the emergence of digital banks.
“This could be a disruptor for the local banking scene, so it makes business sense if banks are game for consolidation,” he told StarBiz.However, he said the success of any merger depends on the willingness of both parties to transact at what they deem as a fair price. It may mean job cuts and redundancy, which can be difficult in the current economic climate.
The question is who has the financial means to enter into a potential M&A with HLB, which is the fifth largest banking group by assets?
According to sources, potential candidates could be Grab or the likes of Permodalan Nasional Bhd-controlled Malayan Banking Bhd (Maybank), whose name has also cropped up in the recent past in relation to a merger with HLB.
Private investor and former investment banker Ian Yoong said there are few domestic banks in Malaysia that can afford to acquire HLB.
“One bank comes to mind – Maybank. It is possibly the only local bank with the balance sheet to acquire HLB. But Maybank or any potential acquirer will have to take on a sizeable amount of goodwill and earnings per share dilution in an all-cash deal,” he told StarBiz. According to Yoong, a share-swap transaction will be broadly neutral for HLB’s shareholders, but much depends on the terms of the acquisition.
“If indeed there is a deal forthcoming, it would most likely be a cash and share-swap transaction, as HLB shareholders may not be keen on swapping the best-managed bank equity for equity of a less well-managed bank,” he added.
Meanwhile, Grab has a sizeable cash holding.
“Market talk that Grab is eyeing a stake in AmBank remains just that as nothing has been confirmed.
“Hypothetically speaking, it makes sense for Grab to pursue HLB because of the banking group’s regional presence, which fits Grab’s ambition to be a financial powerhouse in South-East Asia,” said a banking source.
“However, the issue is whether a conflict of interest may arise as Grab has a digital banking licence and banks are not allowed to have cross-holdings in another bank,” he added
UOBKH said an all-cash deal would be more positive for shareholders of the bank.
“In our view, HLB’s shareholders would benefit from an all-cash deal, given its premium valuation of 1.46 times price-to-book value (PBV) for a return on equity (ROE) of 11% versus the sector average of 0.95 times PBV on a marginally lower ROE of 10%,” said the research firm.
It noted that HLB has superior franchise on most key operating metrics and a share-swap deal structure could result in a dilution on some of these for the bank’s shareholders receiving the shares of the merged entity.
But given the scale of any potential acquisition in view of HLB’s market cap, it said a share swap option would be more sensible for the potential acquirer although it could be earnings per share neutral to slightly dilutive.
The research firm believes that HLB’s share price will continue to outperform its peers, given the group’s defensive asset quality, above-industry loan growth and solid liquidity metrics, coupled with robust growth from its associate Bank of Chengdu in China.
Shares of HLB closed six sen up to RM20.88 yesterday.