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Public Bank of Malaysia eyes $1.5-B rights issue

Publication Date : 03-05-2014


Public Bank Bhd, which has firmly etched itself in the banking sector as the most prudent financial institution in Malaysia, surprised the market when it proposed a 5-billion-ringgit (US$1.53 billion) rights issue.

It is the bank’s first cash call in 17 years and the largest by a local financial institution in recent years.

Adding spice to the fund-raising exercise is the fact that Public Bank’s founder and chairman, Tan Sri Teh Hong Piow, who owns 24.08 per cent  of the bank, has undertaken to subscribe his entitlement in full. This would mean that the 84-year-old Teh will be pumping in about 1.2 billion ringgit of his money for the exercise.

This comes as a surprise because Teh, who founded the bank some 48 years ago, has taken a backseat in the management of the third-largest banking group in the country. So far, he is not known to have identified a successor from within his family to take over the running of the bank.

Since 2002, Tan Sri Tay Ah Lek has largely been handling the day-to-day operations of the bank, and of late, deputy chief executive officer Quah Poh Keat has been identified to lead it.

The fact that Teh has committed 1.2 billion ringgit at this stage of his banking career has set tongues wagging.

The commonly asked question is: Why would the seasoned banker commit to a bundle to fortify the bank, considering he has left its running to professional managers?

Also, the amount that Public Bank is raising is said to be above what is required for the bank to fulfil its capital requirements under Basel III.

“Public Bank does need to raise some RM1.1bil, with Bank Negara’s requirement to maintain its collective impairment allowance and regulatory reserves of no less than 1.2 per cent of total outstanding loans by Dec 31, 2015,” says a banker.

The banker opines that the plausible answer is that Teh wants to ensure that he leaves behind a legacy in the form of Public Bank, and hence, the need to “over-capitalise” the bank.

“Teh probably does not want Public Bank to be in a position sometime down the future where it is short of capital because of a downturn or certain regulatory requirements. He does not want the bank to be in a position where it is coerced to merge or sell a stake to another bank because of lack of financial muscle,” adds the banker.

“Moreover, when the economy is still growing and the going is still good, it’s best to raise funds to fortify the capital now than later.”

There has been much speculation in the past of the likes of CIMB Group Holdings Bhd and foreign Chinese banks eyeing Public Bank as an attractive acquisition target.

In CIMB’s case, the synergies are obvious. While CIMB leads in the investment banking sector, Public Bank comes out tops in consumer banking.

Meanwhile, banks from China, with their deep pockets, have displayed strong interest in acquiring a controlling stake in Public Bank.

Acquiring Public Bank is by no means cheap. Even without the rights, Public Bank’s market capitalisation is today ar 69.8 billion ringgit.

Public Bank’s price-to-book valuation of 3.4 times is higher compared with other banks in Malaysia, which are all trading at less than two times price-to-book. Malaysia’s largest financial institution, Malayan Banking Bhd (Maybank), and the second-largest CIMB, are both trading at price-to-book multiples of only 1.9 times.

The high valuation that the market accords Public Bank is an incentive for Teh and other shareholders to subscribe for the rights issue. For every RM1 that they put in, the market gives it a valuation of RM3.40.

“A RM1.2bil capital infusion by Teh will immediately triple its value to 4 billion ringgit," says an analyst.

While beefing up its capital position has been anticipated, the 5 billion ringgit quantum took the market by surprise. This now effectively over-capitalises Public Bank from its previous position of being the lowest among its peers in meeting the capital requirements of Basel III.

As of the first quarter, it had a common equity tier-1 (CET-1) ratio of 8.4 per cent. With this proposed rights issue, Public Bank will have an extremely comfortable CET-1 ratio of 10.4 per cent, way above the 9 per cent to 10 per cent requirement.

In comparison, Maybank’s CET-1 is 11 per cent, with RHB Capital at 10.3 per cent. CIMB has the lowest at 8 per cent.



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