The Malaysian Insider publishes two articles that are somewhat critical of certain unique requirements that BNM imposes on the sale of Abu Dhabi Commercial Bank to Aabar Investment Fund. Both articles can be accessed here and here.
First and foremost, I do not know why the media is obsessed with this thing about being the biggest bank in ASEAN. Being biggest means nothing if you are not profitable. Plus, I don't think it is healthy to have one bank to be almost 100% larger than the next one. Singapore have three large banks that are pretty close to each other in terms of asset size. Just because we want to be bigger than Singapore, we artificially create one big bank. Since these banks are kinda under government control, it may expose ourselves to the risk of having a government that try to influence the lending policy of one of the biggest bank. It is harder to convince three banks to do something stupid than to convince one. It is not that it has never happened before in the history of South East Asia. Thaksin influences Krung Thai Bank, a state-owned Thai bank, to do some silly loan expansion. When you do silly expansion of your loan portfolio, you are bound to have tonnes of NPLs and that's what happened to Krung Thai. Imagine, sometime in the future, our government try to convince the merged Maybank-RHB, which is almost 100% larger than CIMB, to do something silly. When the blow up happened, the bail out will be huge. A big number of Malaysians deposit will be at risk. It is okay if the government do something silly with BSN or some tiny bank, but, by having such a bloody big bank, it amplifies the risk of a blow up.
Then, there is this criticism about BNM being a nanny by imposing all these rules. Critics says that BNM is not allowing the free market to do its job. I thought there is nothing free market about the deal as prices are artificially inflated and the thing BNM is doing does make sense. It is highly likely that the Abu Dhabi fellas will sell their stake in RHB when the takeover happened. No one would want a minority stake in a non-traded entity. So, what this Abu Dhabi fellas is doing is to create an artificial floor to the price of the takeover. Since both CIMB and Maybank are buying control, they need to pay a much higher price than the artificial floor that is created by the Abu Dhabi right pocket to left pocket deal. That artificial floor may be set at too high of a price. Since they are paying above book, it increase the leverage of the company if measured at tangible asset basis. It does create a higher risks.
Whether Nazir Razak and all do influence this rule being set by BNM, I do not know. But, I think what they did do make sense to me. The Abu Dhabi fellas is creating an artificial floor to the price. BNM is quite highly regarded across the world, I do not think they can be at where they are without a certain form of independence.
UPDATE: Just came across this post at the_earthinc which have an alternative opinion, do give it a read here.
UPDATE: Just came across this post at the_earthinc which have an alternative opinion, do give it a read here.
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Read what Nazir said today in the news. In the event of shares swap, the artificial floor price you mentioned does not matter. It is just a ratio. I think you over read what the Abu Dhabi dudes are doing. They have their reason to cross their blocks at high price and it is likely not to have anything to do with the CIMB/Maybank/RHB deal.
ReplyDelete@Shadow,
ReplyDeleteWhat Nazir said does not means it is true just because he is Nazir Razak. Where is there such a thing whereby the value of the deal is not important? It is important because it will affect the dilution and how many people are willing to sell.
Regardless of Nazir comment, whenever you buy something above book,whether it is a share swap or cash, you are increasing your leverage on tangible basis and lowering your NTA per share cover. It increases risk.
The Abu Dhabi dudes, their reasons given is terrible. I believe it is something about capital ratio and basel convention. Since someone is already buying your shares via the RHB takeover, can't you wait a month or two for it to be done? Why the rush?
The rush is some entity within the Abu Dhabi group have debt obligations to fulfill and it is just a way of shuffling the cash between their units. Anyway, i think too much emphasis is put on the how they price their shares with reference to how RHB/RHB Cap will be priced.
ReplyDeleteAs to why valuation does not matter. The dilution which you mentioned that affect investors' willingness to sell is valid if investors are all rationale and savvy. I dont think they are and a lot of them will jump at a high valuation accorded to RHB/RHB Cap without looking too closely at the valuation used for CIMB. This is especially so when they are offered the carrot of getting exposure into the enlarged group with some rosy story.
A good reference will be to look at how CIMB was privatized by Commerce in its hey day. You speak as a rationale investor. If everyone speaks like you, we are looking at a strong efficient market. My contention is that is not the kind of market we operate in.
@Shadow,
ReplyDeleteThe reason I think their reason of paying off debt is weak is because banks always roll over their debt. Unless your leverage is extremely high which affect your capital adequacy ratio, I think banks will generally roll over. My perception on Abu Dhabis or middle eastern banks as I do take a look at them early last year is that their capital ratios is actually quite high, thus, underleverage rather than overleverage. Things may have changed since that one year, but, till early last year, their banks is actually a bit over-capitalize.
Another thing why I sometimes do not trust media report is that, it always quote anonymous sources. Yes, that may indeed be needed because no one want to be offending another person. But, it could be that anonymous source is some Investment banker that actually worked for that client to get the information out. So, as IB-ers always do, they will cook up any sort of rubbish explanation.
I think that BNM is looking at the big picture rather than the small picture of the banks and retail investor. As any takeover will need the buy in from the Abu Dhabi guys, the price will become a sticking point. Because, even though both the bank and the investment fund are from the same shareholder, it still affect the investment fund PL if it the deal were to be priced lower than their acquisition price. They may have to take a loss within months of buying, they will have a reason not to sell. By doing away with that RM10.80 reference price, it take away their reason. It is like a GLC selling their stake to Khazanah, Khazanah may be from the same shareholder, but, any losses will still make the people within Khazanah look bad as people focus on headline number. Plus, analysts may advice other institutional investor to hold on as the price will be set as a reference price, if not, they may be a breach of their duties. You can't ignore the RM10.80 as an anchor.