Is there an Alliance in the works?

BANKING mergers or rumours of them are always good fodder. Mergers and acquisitions (M&As) involving banks are among the biggest such deals in the country and rarely take place.

This time around, the talk involves one of the smallest banks, Alliance Bank Malaysia Bhd.

The talk is that Singapore’s biggest bank, DBS Group Holdings Ltd, which is also the largest bank in South-East Asia by assets, is looking to buy Temasek Holdings Pte Ltd’s stake in Alliance Bank Bhd.That stake though is complex.

Temasek owns 49% in Vertical Theme Sdn Bhd, which in turn holds a 29.06% stake in Alliance Bank. This stake is worth RM2.25bil, going by Alliance Bank’s market cap of RM7.74bil.

The remaining 51% stake in Vertical Theme is held by Langkah Bahagia Sdn Bhd, which is owned by three individuals, namely Singapore hotelier Ong Beng Seng, private equity player Ong Tiong Sing and corporate adviser Seow Lun Hoo.

Recall that Langkah Bahagia was previously linked to the late Tun Daim Zainuddin.

While the links are not proven, it does seem more than coincidental that M&A talk involving Alliance Bank has surfaced following Daim’s passing three months ago.

It was in April 2016 when the three individuals emerged as owners of Langkah Bahagia. As their shareholding was less than 5% each, the acquisition did not require Bank Negara’s nod.

Another interesting development is that one of those three individuals, namely Beng Seng, has been facing some legal troubles in Singapore.

Could that also be a factor in the possible M&A involving Alliance Bank?While the media report speculated that DBS was looking to buy Temasek’s 29% stake in Alliance Bank, it did not make mention of the fact that those three individuals would also need to be bought out for DBS to gain control of that 29% stake.

Meanwhile, it is notable that DBS and Alliance Bank have a common shareholder in the form of Temasek, which owns a 28.9% stake in the former.

So a potential merger does make sense.

Temasek bought into Alliance Bank two decades ago, and talk that it wants to exit has been around for quite a while now.

It is believed that the Sarawak state government had initiated early talks with Alliance Bank before settling for Affin Bank Bhd. “Observe that Temasek didn’t aggressively grow Alliance Bank,” one banker quips.

That said, Alliance Bank has healthy financial metrics versus some bigger peers.

TA Research in a recent report notes that the bank has demonstrated strong performance, particularly in the small medium enterprise lending space.

It also boasts a competitive current account savings account ratio of 41.5%, which is one of the highest in the industry, and has maintained a return on equity of more than 10%.

Having DBS as a major shareholder could benefit Alliance Bank considering the former’s expertise in corporate, wholesale banking and wealth management segments.

With DBS’s extensive regional network, Alliance Bank could also scale its product offerings and expand its distribution channels more effectively.

Regulatory hurdle

However, the banking sector is highly protected the world over. This is why the entry of a foreign entity into a country’s banking landscape is never easily allowed.

Just try making a pitch to buy a bank in Singapore, for example.

In fact, the Malaysia-Singapore banking dynamics can give us a clue as to how the respective countries’ regulators could decide on allowing shareholding changes.

Only one Malaysian bank, namely Malayan Banking Bhd, has a qualifying full bank (QFB) licence in Singapore. CIMB Group Holdings Bhd, which is Malaysia’s second largest bank by asset, has yet to be issued a QFB license despite many years of trying.

Foreign banks with a QFB are allowed to offer a multitude of financial services as well as operate from a total of 25 locations.

Conversely though, Singapore’s two other big banks – namely Oversea-Chinese Banking Corporation Ltd (OCBC) and United Overseas Bank Ltd (UOB) – have a significant presence in Malaysia. OCBC and UOB have a total of 38 and 55 branches in Malaysia respectively.

“Why would we want to allow the entry of DBS into the Malaysian market? It is a very strong bank, valued at 1.85 times price-to-book, with deep coffers. The impact on local banks could be severe,” questions a former high-ranking banking official from the Malaysian banking sector.

It is interesting to note that the two Singapore banks operating in Malaysia, namely OCBC and UOB, have been upping their regional expansion.

Could they in turn become interested suitors for Alliance Bank? Them buying into Alliance would not pave the way for the entry of another strong Singapore bank into the Malaysian market.

Meanwhile, relations between the two countries have reached new heights following the formation of the Johor-Singapore Special Economic Zone (JS-SEZ). A notable impact from that was Singapore banking shares got a boost from the JS-SEZ buzz.

However, some think it is unlikely Temasek will want to sell its block to a Singapore rival which directly competes with DBS. On the other hand, the banker thinks if there is an M&A, it would likely be with one of the major local banking groups. “This is more palatable but Alliance Bank’s small size could continue to be an issue with potential suitors.”

One name that cropped up previously in relation to this is Hong Leong Bank Bhd, which is majority-owned by Tan Sri Quek Leng Chen. A few years ago, there was speculation of a potential merger between the two banks. However both parties refuted this.

“While Temasek may be looking to exit, Alliance Bank may not move the needle for any of our bigger local banks. Look at Maybank, it is growing at the size of ‘one Alliance Bank’ every year,” adds the banker.

He makes one other interesting observation about banking M&As in Malaysia – all proposals are usually considered on a case-by-case basis by the central bank.

“So we cannot discount anything,” he notes.