Monday, June 13, 2011

Let's all be wise and sensible - Less Choice for 'Rakyat Malaysia'

Comment in thesun newspaper 9/6/2011

DOES the size of a company matter? To many, the bigger the better as companies believe it will help them to expand and maximise returns and shareholder value, other than achieving economies of scale.
Last week’s separate takeover bids for RHB Capital Bhd (RHB Cap), the country’s fifth largest banking group, by Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd seem to fit this scenario.
However, this notion may no longer hold true especially in an economic crisis as seen in recent years given the severe impact on large corporations and financial institutions. Smaller companies and banks can find their niche and adjust faster to tackle issues in times of crisis.
The collapse of Bear Stearns and Lehman Brothers, and the financial troubles inflicted on insurance giant American International Group Inc and Citigroup are among some recent notable cases.
Taxpayers’ money had to be used to rescue these huge institutions. Thus, it was not surprising for the US to undertake several sweeping changes early last year to limit the size and trading activities of financial institutions to reduce risk-taking and avoid another catastrophe in the financial markets and global economy.
In the case of Toyota Motor Corporation, the numerous recalls of millions of vehicles in 2009 and 2010 by the world’s largest carmaker showed bigger does not necessarily mean better. The usual rationale of big means stronger and better has proven not to be the perfect solution.
A lot depends on the competency and integrity of the CEO and board of directors running a bank or corporation. The transition into a global or regional entity could also have been the factor behind the quality issue.
There are cases of financial institutions chasing a sizeable and strong balance sheet at the expense of quality services especially with the integration of operations. Customers are charged for services which were previously provided free, such as counter services as some institutions want their customers to use the automated teller machines (ATMs).
That ATM usage, too, is levied a fee. Worse still, services with low yields, such as safe deposit boxes, are scrapped or conditions imposed on those requiring such facilities. In other words, the personal touch – once the trend in the bank-client relationship – has slowly disappeared as institutions get bigger.
The latest bid for RHB Cap by Maybank and CIMB was triggered by the potential sale of the 25% stake from Abu Dhabi Commercial Bank (ADCB). If the battle for the bank intensifies, ADCB, the foreign minority, will end up as a major winner (other than EPF)
benefiting unnecessarily at our expense.
Already RHB Cap share price has hit a 14-year high at RM10.40 on June 1 –  a day after the announcement – compared to its book value of RM4.79 per share. With the share price rising so substantially, one should ask if any party had taken advantage of the situation.
Bank Negara has given the nod for both Maybank and CIMB to bid for RHB, thus formally endorsing a takeover battle.
The deal will see an outflow of money, and the foreign exchange will be hit once ADCB exits the country with the proceeds converted to foreign currencies.
Any merger exercise must have incremental value for the enlarged entity, but this merger is more to enlarge the balance sheet. Given the same client base of the three financial institutions, some question the logic of Maybank and CIMB bidding for RHB Cap since there is not much incremental business involved in the domestic banking scene.
In Malaysia, how many big businesses are there for the banks to service?
The takeover of RHB Cap may make the balance sheet bigger but the incremental value will increase only if it is an overseas acquisition. Thus, wouldn’t it be better for CIMB and Maybank to buy overseas banks to increase their exposure to countries like China, Hong Kong and Vietnam in their quest to be a regional player?
What is more surprising is that the three banking groups have the government-backed institutions as their major shareholders and ultimately, all Malaysians.
For Maybank, Permodalan Nasional Bhd (PNB) and its units control about 52% of the country’s largest banking group with EPF owning 10.9%. In the case of CIMB, Khazanah Nasional Bhd owns 28.6% and EPF 11.6%. For RHB Cap, EPF has some 45% stake with ADCB 25%.
The deal, if concluded would be akin to two brothers buying a family asset from their father. No new value is created, but in the process, minority shareholders, especially foreigners would reap a huge capital gain and result in a substantial outflow of foreign exchange. Let’s not overpay and enrich the foreign minority, ADCB.
Wouldn’t it be better for the banks to consolidate their businesses after having been aggressively expanding over the last few years?
Whoever wins the battle, it is ultimately the people’s money used for the acquisition. Thus the people will end up paying an astronomical price for the bank although they already owned the three banks.
Many licences, including those for Islamic banks, have been issued to foreign financial groups since the consolidation of banks about a decade ago, and they were “given free”.
In the interest of the banking industry, and for the sake of Malaysia, let good sense prevail when it comes to this takeover proposal. It would be wise if one of the banks withdraws and not engage in a price battle which will chase the price up.
Maybank and CIMB should work together and not as rivals. Better still, leave RHB alone to operate an already successful banking group.
We hope that the authorities will step in to manage this unique situation.

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