RHB buyers can enjoy Islamic banking profits

Potential buyers of Malaysia’s RHB Capital Bhd can grab an increasing share of the biggest market for Islamic bonds at a 24 per cent discount to the bank’s rivals.

RHB, whose Islamic banking profits rose ten times faster than total earnings last year, will become Malaysia’s largest stock broker after its acquisition of OSK Investment Bank Bhd, according to data compiled by Malaysia’s stock exchange.

As heightened competition from foreign lenders spurs mergers among Malaysia’s banks, the OSK purchase will further boost RHB’s allure, with the Islamic banking franchise also attractive for overseas bidders, Alliance Research Sdn. said.

After a 19 per cent drop since RHB’s merger talks with Malaysia’s two largest lenders ended in June, the bank is trading at 1.49 times book value, cheaper than all except one of its domestic peers, according to data compiled by Bloomberg. RHB’s biggest investor, Malaysia’s Employees Provident Fund, would be willing to sell, Aberdeen Asset Management Plc said, while another shareholder, Aabar Investments PJSC, has gauged Sumitomo Mitsui Financial Group Inc’s interest in its 25 per cent stake, according to two people familiar with the matter.

“It’s a takeover target and the OSK acquisition could make it easier to sell,” said Gerald Ambrose, who oversees RM5.4 billion (US$1.8 billion) in assets as managing director of Aberdeen in Kuala Lumpur.

“It would have national coverage and good exposure to retail as well as investment banking. There are foreigners who want exposure here, and if you’re a foreign Islamic bank, you’d be better buying a local brand.”

RHB didn’t reply to a request for comment on its takeover potential. The bank traces its origins to 1913, when Malaysia’s first local bank formed in Kuala Lumpur with RM300,000 of startup capital. In 1997, that lender merged with DCB Bank Bhd to create RHB Bank Bhd in what was then Malaysia’s biggest banking merger.

RHB, which received an Islamic banking license in 2005, agreed to buy control of Indonesia’s PT Bank Mestika Dharma in 2009. The deal still needs approval by Indonesian regulators, which RHB expects by June, the company said this week.

The lender’s total assets have already jumped 46 per cent to RM152 billion since the height of the global financial crisis in 2008, according to data compiled by Bloomberg. RHB will post its seventh straight increase in annual revenue and profit this year, analyst estimates compiled by Bloomberg show.

Even with earnings projected to climb, at a closing price of RM7.74 before yesterday’s holiday in Malaysia, RHB is trading at 1.49 times book value. That’s 24 per cent less than the average multiple of 1.96 times for RHB’s domestic rivals with market values greater than US$1 billion, according to data compiled by Bloomberg. It’s also cheaper than all seven of its competitors except for Affin Holdings Bhd., the data show.

RHB asked Malaysia’s central bank in January for approval to buy OSK Holdings Bhd’s investment banking unit. Merging RHB, Malaysia’s sixth-biggest stockbroker by value of domestic share trading as of March, with OSK Investment Bank would vault the enlarged entity past top-ranked CIMB Investment Bank Bhd, data from the stock exchange show. OSK, with offices across Southeast Asia, also underwrites bond sales and initial public offerings.
The combination will also create Malaysia’s fourth-largest bank by assets, adding to earnings potential and increasing its appeal to buyers, said Cheah King Yoong, a Kuala Lumpur-based analyst at Alliance Research.

“RHB by itself, no doubt it’s very strong, but it’s a mid- sized bank,” he said. “It doesn’t have the size and scalability premium. With this merger it will.”

RHB is also the top underwriter of ringgit-denominated Islamic bonds sold this year, according to data compiled by Bloomberg. Among global Islamic debt underwriters, RHB ranks fourth behind HSBC Holdings Plc, Deutsche Bank AG, and Malayan Banking Bhd, Malaysia’s largest bank and also known as Maybank, the data show. The rankings currently exclude a RM2.5 billion- issuance by Maxis Bhd in February.

Profit before tax from the business that complies with Islam’s ban on interest jumped 52 per cent to RM138 million in 2011, while total Islamic assets surged 73 percent, according to RHB’s annual report. Total profit before tax at RHB rose 5.3 per cent to RM2 billion.

Ringgit-denominated Islamic bond sales more than doubled last year to the equivalent of US$24.6 billion, data compiled by Bloomberg show. That compares to a worldwide Islamic bond market of US$36.3 billion in 2011, according to the data. The Kuala Lumpur-based Islamic Financial Services Board estimates the industry’s assets will surge to US$2.8 trillion by 2015.

Malaysia's financial system, or the sum of loans, bonds and stock-market capitalization, may expand this decade at an annual pace of as much as 11 percent to 9.1 trillion ringgit by 2020, Bank Negara, the central bank, said in December.

That growth will come as Malaysians become older, richer and more willing to spend. Over the next decade, income per capita may double while the average age could rise to 30 from 26, the central bank said.

“The Malaysian banking industry is attractive,” said Tan Teng Boo, managing director of Kuala Lumpur-based Capital Dynamics Asset Management Sdn. “There is still room to expand, and for the more efficient and innovative players, to capture market share.”

Islamic financing may account for 40 per cent of the whole Malaysian market, up from 29 per cent in 2010, the central bank said. Banking assets in the country that comply with Syariah law grew an average 20 per cent annually since 2006 to reach RM350.8 billion at the end of 2010.


The potential for RHB’s Islamic banking business, and the central bank’s willingness to waive a cap on foreign ownership of commercial banks, means the Middle East and neighbouring Indonesia may yield suitors, said Cheah.

Bank Negara will evaluate foreign buyers on a case-by-case basis, rather than enforce a 30 percent cap on ownership, it said in December.

“What RHB could really offer is a foothold, a platform to offer Islamic finance product by capitalizing on Malaysia’s leading position in this area,” Cheah said.

The industry is also a lure for banks from non-Muslim nations. Six of Malaysia’s 16 Islamic banks are under foreign ownership, according to the central bank’s website. Tokyo-based Mizuho Financial Group Inc in February was granted a license to offer syariah-compliant services in the country.

“Islamic banking in Malaysia is also attracting Japanese lenders,” said Shinichiro Nakamura, a Tokyo-based banking analyst at SMBC Nikko Securities Inc. “In addition to commercial lending, Japanese banks are keen to team up with local partners in Malaysia to boost investment banking.”

Abu Dhabi’s Aabar Investments, which owns a 25 per cent stake in RHB, met Tokyo-based Sumitomo Mitsui in February in an effort to sell the stake, two people with knowledge of the matter said, asking not to be named as the information is private. Sumitomo Mitsui, which was among investors considering buying the stake from Abu Dhabi Commercial Bank PJSC last year before it was sold to Aabar, hasn’t made a final decision on the offer, one of the people said.

Aabar and Sumitomo Mitsui declined to comment on their plans for the stake.

The opening of Malaysia’s financial system may also drive mergers among local banks, said Tan Lip Kwang, who helps manage RM2.8 billion of assets including RHB Capital shares at K&N Kenanga Holdings Bhd in Kuala Lumpur.

“The government hopes that the number of banks will reduce to five or six,” said Tan. Malaysia currently has eight domestic commercial banks, down from 22 in 1986, according to the central bank. “RHB has got the resources, OSK has the skill set,” and the merged group might appeal to CIMB, Tan said.

Still, previous talks last year between RHB and both CIMB and Maybank failed to yield a deal. The banks ended discussions after Aabar bought its stake in RHB from Abu Dhabi Commercial Bank for RM10.80 a share, or 11 per cent more than RHB’s stock price at the time, data compiled by Bloomberg show.

Malaysia’s Employees Provident fund, which owns 45 per cent of RHB, will only consider merger plans once the bank has closed the two pending purchases of OSK and Bank Mestika Dharma, according to Azlan Zainol, chief executive officer of the state- run pension fund.

The Malaysian buyers may come back after RHB completes the OSK deal, said Geoffrey Ng, who manages US$1.4 billion as chief executive officer at HLG Asset Management Sdn in Kuala Lumpur.

RHB said this week that it expects to close the acquisition in the third quarter of this year.

RHB’s retail banking network will appeal to Maybank, CIMB or Malaysia’s third-largest lender, Public Bank Bhd., which are “keen to increase their market presence,” he said.

Maybank and CIMB declined to comment on their interest in RHB. Public Bank didn’t reply to an e-mail seeking comment.

“It could prove to be a fairly attractive target,” Ng said. “With the acquisition of OSK’s franchise, it will beef up its presence for sure.” -- Bloomberg

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