A strategic shift

IT has been a while since a listed banking group called for a rights issue.

Alliance Bank Malaysia Bhd’s decision to do so now has put the bank in the spotlight and caused the stock to lose about RM690mil in market value, erasing all year-to-date gains as some holders sold their shares following the planned cash call.

The Alliance Bank story is more interesting because of its major shareholding issue. It has been reported that Singapore’s DBS Bank Ltd is interested in acquiring Alliance Bank.

Temasek Holdings Pte Ltd is the single largest shareholder of both banks, and Temasek could use that shareholding to steer DBS’ entry into the Malaysian market which it has been trying for a long time.

As for Alliance Bank’s surprise renounceable rights issue, it is estimated to raise about RM600mil to buffer its most important capital ratio.

Does the exercise go beyond raising capital?

Alliance Bank’s complex shareholding structure does seem in need of change, which supports the speculation.

There is always attention drawn to the three individuals who jointly own the Vertical Theme Sdn Bhd controlling block with Temasek – Malaysian billionaire businessman Ong Beng Seng, private equity player Ong Tiong Sing and corporate adviser Seow Lun Hoo.

The complexity in the shareholding is simply this: Vertical Theme is the entity that owns 29.06% of Alliance Bank.

Vertical Theme is 49%-owned by Temasek and 51%-owned by those three individuals.

This means that Temasek has an effective stake of 14.2% – making it the single largest shareholder.

Do note that Vertical Theme has given its undertaking to subscribe to its portion of the rights issue.

Since the Financial Services Act 2013, Bank Negara has encouraged banks to institutionalise their shareholding.

Could this mean that the central bank wants an institution like Temasek to have a larger shareholding role in Alliance Bank?

The foreign shareholding limit for local banks is 30%, but exceptions can be made based on specific conditions or special approval.

Bank Negara must approve the proposed rights issue. The central bank may impose conditions. Currently, the relevant parties are in negotiations with Bank Negara about this issue.

According to Alliance Bank Group chief executive officer Kellee Kam, the bank did not wait for Bank Negara’s approval before announcing the rights issue in order to make sure their intentions are communicated to the market in a timely manner.

“We have consulted with Bank Negara on this proposal, and we have made it clear that it is subject to regulatory approval (including Bank Negara),” Kam says.

Some may wonder how the three individuals became Alliance Bank shareholders. Langkah Bahagia Sdn Bhd was previously linked to Tun Daim Zainuddin, the country’s former finance minister.

Interestingly, merger and acquisition (M&A) talk involving Alliance Bank emerged after Daim’s passing in November last year.

In April 2016, the three individuals became owners of Langkah Bahagia.

Their effective shareholding in the bank was less than 5% each, so the acquisition did not require Bank Negara’s approval.

One of the three individuals, Beng Seng, has been facing legal troubles across the causeway in a case involving a former Singapore government minister who was jailed for receiving gifts from the property tycoon.

Beng Seng will plead guilty later than scheduled on April 2, according to news reports this week.

“Will Beng Seng pass the central bank’s fit and proper test? If not, who will take up his block?” a retired banker asks.

According to him, it is likely Temasek will increase its stake (by subscribing to Vertical Theme’s rights shares), thereby diluting the three individuals.

Going by earlier speculation that Temasek may be keen to facilitate the entry of DBS (which it also owns) into Alliance Bank, could it be possible that Temasek will then divest its beefed up controlling block of shares to the Singapore bank?

Such an exercise could also pave the way for the three individuals to exit Alliance Bank at a higher premium

Whether Bank Negara will allow DBS to enter the Malaysian market remains to be seen. Clearly, there is a good reason for this. There are already two large Singapore banking groups – OCBC and UOB – operating in Malaysia and doing brisk business.

In Singapore only one Malaysian bank – Malayan Banking Bhd (Maybank) – has a qualifying full bank (QFB) licence, which allows a foreign bank to offer a multitude of financial services. CIMB Group Holdings Bhd has yet to be issued a QFB licence despite many years of trying.

Even Singapore’s smallest bank, UOB, has a larger market capitalisation than Malaysia’s largest lender Maybank.

Business as usual?

There’s a possibility that the rights issue by Alliance Bank could be nothing more than an attempt to raise capital buffers to maintain growth. The bank remains the smallest in terms of asset size.

Its CET1, which is a measure of a bank’s strength based on the highest quality of regulatory capital, stood at 12.4% as at end-December 2024 which is below the targeted 12.5% and the lowest among its listed peers.

The RM600mil it intends to raise is relatively smaller to what local banks have raised in the past but this likely reflects its smaller size, say observers.

The cash call would improve the CET1 to 13.5%, bringing it closer to the industry average of 14.3%.

“We have consistently been delivering good dividends, while maintaining a solid CET1 capital ratio of above 12%.

“Only recently has the bank adjusted its dividend payout to 40% of earnings (down from 50%) to retain more capital for growth,” says Kam.

With strong post-Covid loan growth at 9.7% compound annual growth rate (versus 3.3% pre-Covid), he adds that the rights issue aims to improve CET1 by 1.1% to support further expansion.

In its recent third quarter ended Dec 31, the bank reported a 14.2% year-on-year loan growth, which significantly outpaced the industry average of 5.6%, one research firm notes.

The bank revealed that it had considered various funding options but chose a rights issue as the best way to strengthen its CET1 capital.

A private share placement was deemed less viable as it would require at least two years to raise the equivalent gross proceeds, potentially constraining growth while diluting non-participating shareholders.

A cutback in dividend would only enhance capital by about RM200mil to RM300mil per year.

In the case of perpetual bonds, these instruments do not qualify as CET1 capital, but as additional Tier 1 capital.

An application has been made to Bank Negara. The bank aims to complete the exercise in the third quarter of 2025.

Alliance Bank’s other major shareholder is the Employees Provident Fund with 8.9%, while Global Success Network Sdn Bhd (the investment vehicle of Lee Thiam Wah of 99 Speed Mart) holds 4.98% stake.

With its share price falling 4% year to date to RM4.68, some think the sell-down is overdone.

Two research firms have upgraded their calls to “buy”, making that six firms in total. There are nine “hold” and one “sell” rating, according to Bloomberg data. At this level, Alliance Bank is trading at a price-to-book value of 0.97.