Government-Linked Banks Make A Bet

When we make a bet, we want to win! But can be said about the track record of government of Malaysia. More often than not, they always pay higher than market rate, firstly of being a late mover, and secondly of being too simplistic in forming the expectations, and worst still, if some deals are quite suspicious in nature.

Being a late mover is not a sin, but paying a hefty premium is a death penalty in the heydays of Comrade Stalin and Chairman Mao Zedong.

Feedback from my analyst friends in Thailand is that the 2.9x book-value (BV) or 59% premium to last traded prices of BankThai price of Bt1.32 of BankThai paid by Bumiputra-Commerce is indeed, every expensive premium. The three latest M&As were done in the range of 1.2-1.6x BV. The only different between the case of BankThai and the other three M&As is for management control and potential 100% stake. But one should also be aware that further capital injection of RM500-600mn is needed into the new acquisition to bring the RWCR from 7.5% to a target of 13-15%. We are still not too sure about the need of provision despite its huge exposure to CDOs investment, even though management of Bumi-Commerce made the assurance.

Likewise, with the purchase of a 20% stake in Pakistan’s MCB (previously known as Muslim Commercial Bank) by Maybank. The agreed price is an 11% premium to MCB’s most recently traded price and 5.1 times trailing book value. Also, I also take note of the purchase of Bank Internasional Indonesia (BII) for US$2.7 billion -- an expensive 4.6x BV, compared with fast-growing Chinese banks trading at between 3.3 and 5.4x book value. The share price of Maybank fell 9% in the deal's wake. As the head of research of CLSA, Nick Cashmore succinctly puts it that Indonesia wants control and a strategic buyer is not going to spend for a 30 percent stake that they cannot control.

All these purchases are made in justification of hopes and RHB Capital Bhd has also stated its intentions to go regional. It may look very glamorous but ultimately it could turn out to be an expensive exercise laden with risks. The fittest survives!