By Jose Barrock
In the second part of our series on non-bank financial institutions and their heavy lending to the household sector, especially through personal loans, we take a good hard look at Malaysia Building Society and whether it would toe the line in terms of Bank Negara Malaysia’s demands and the options available to it.
There is a lot happening behind closed doors in development financial institutions (DFIs), non-banking financial institutions (NBFIs) and the co-operative movements, collectively known as the shadow banking system, with Bank Negara Malaysia, cracking the whip, trying to put things in order.
For one Malaysia Building Society Bhd (MBSB) is understood to be in talks with Bank Negara Malaysia, to give up its building society licence and come under the Central Bank’s purview, operating with a banking licence instead, industry sources say.
Some say this could be a precursor to the much talked about, and much awaited merger between RHB Capital Bhd, which wholly owns RHB Bank Bhd, with MBSB. Murmurs of a merger are fuelled by both entities being controlled by the Employees Provident Fund (EPF), which has 68.87% in MBSB and 41.01% in RHB Cap.
However the source who is familiar with the on-goings at the Employees Provident Fund (EPF) begs to differ.
“Actually it is just one of the options… MBSB could operate on its own as well, as a separate banking entity from RHB, things are very fluid,” the source said.
Talk of MBSB being privatised has been on-going for many years. Mid last year it surfaced again, but there has yet to be anything concrete.
What has been speculated more recently however is for the EPF to buy out the other shareholders of RHB Cap, and merge it with MBSB.
The merger plan
However one key problem lies with RHB Cap’s second largest shareholder Aabar Investments which has a 21.88% block or 545.79 million shares. At current price levels of RM8.70, RHB Cap has a market capitalisation of RM21.7 billion. This would give Aabar’s block a market value of RM4.75 billion.
However Aabar had acquired the block from Abu Dhabi Commercial Bank at RM10.80 per share or RM5.7 billion in June 2011, which is a 20% premium to the prevailing market price then.
Aabar would look at making gains on its investment, which would entail EPF forking out a premium to the RM10.80 price tag. A simple 20% premium for Aabar would nudge the offer price up to RM12.96 for EPF.
At RM12.96, EPF would have to pay in excess of RM19 billion, for the 1.47 billion shares it doesn’t not own in RHB Cap.
While privatising MBSB seems like an easier option, Bank Negara was understood to have been adamant about MBSB giving up its special position as a Scheduled Institution under the Banking and Financial Institution Act 1989 (BAFIA), as an Exempt Finance Company, which allows it to undertake financing activities in the absence of a banking license.
“MBSB is working towards giving up its special position and operating under Bank Negara’s control…MBSB is working towards this,” the source clarified.
Bank Negara is meanwhile looking to have some control over the running of the shadow banking system before the Financial Services Act of 2013 comes into force, where it will have more control of the entities – DFIs, NBFIs and co-operatives.
Bad memories
These days MBSB is a company with a market capitalisation of about RM5 billion. For its first three months of FY2013, the company registered net profits of RM166.14 million from RM562.47 million in revenue.
MBSB’s stock hit a five year high recently, crossing the RM3.20 band. Since then it has tapered of and closed on Tuesday at RM2.90.
Many attribute the improvements in MBSB to current management which took over the reins in 2009.
Things were not so rosy before that. From 1998 to 2004, MBSB bled losses.
According to reports by opposition politicians, MBSB’s non-performing loans (NPLs) reached a high of RM 4.45 billion in 2002 giving it a NPL ratio of 62%, in contrast to the banking average of 7.4% in 2002.
It’s only in 2012 that MBSB’s total reserves were positive for the first time since 2001.
MBSB had also sought legal redress against its chief executive Yusuf Sudin, but failed in its attempt, and its claim was dismissed. MBSB had felt that Sudin had not performed his fiduciary duty.
With such a bad showing many in the opposition camp took the chance to question EPF being allowed to control RHB Capital, as more than just an investor, but a manager as well.
Tony Pua
“MBSB is notorious for giving huge loans to politically-connected companies such as to the failed Perwaja Steel,” opposition lawmaker Tony Pua has said before.
MBSB’s chequered past, and the rampant allegations of mismanagement seem to cloud whatever achievements the current management may have. The building society seems to have been roped in with other non-performing shadow banking outfits.
Bank Negara in its Financial Stability and Systems Report 2012 said that in the case of NBFIs, more than 80% of the lending portfolio was made up of personal financing, while in contrast, the banking system’s is some 5%. However during 2012, NBFIs approved more than 600,000 new personal financing facilities worth RM43 billion, an increase of 63.7%, while personal financing facilities approved by banks in 2012 declined by 6.2% to RM19.4 billion.
“In 2012, overall credit on all facilities extended by the three largest NBFIs (encompassing a DFI, a large cooperative, and a building society) expanded at a faster rate of 23.1% (2011: +17.1%).
“The strong credit expansion was primarily driven by the increase in personal financing activity which rose at its fastest pace to date by 30% (2011: +25.1%; 2010: +28.7%),” Bank Negara said.
Lawmaker Pua has also questioned the ability of EPF to run RHB Cap when it couldn’t even get its act together when running MBSB.
On MBSB Pua had said, “It is worth noting that the EPF board has no proven track record to speak of, in recruiting the best candidates to operate its own subsidiaries…One of the key reasons for EPF’s poor investment returns are due to EPF’s involvement in questionable projects and bad loans given out by MBSB. MBSB is notorious for giving huge loans to politically-connected companies.
“EPF should stick to its charter to prudently manage the retirement funds of Malaysian workers utilising low risk strategies such as a diversified portfolio in equities to generate safe and reasonable returns. EPF has no business attempting to be a “business owner” which leads to re-aligned objectives and incentives as well as significantly higher risks,” Pua had said back in 2007 on MBSB.
With Bank Negara turning the screws will things pick up at MBSB, and will the shadow banking system come under control?
Tomorrow: The politics behind cooperatives
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