RHB Capital Bhd’s outgoing group managing director Kellee Kam believes that the reorganisation of the group comes at an opportune time. “This is wisdom from my board. They say that in business, there are seasons. When it’s summer or autumn, you go out, make the best of it. You farm, you build your business. But when it is winter, don’t go out and start planting or hunting. You are not going to get good deals, you are going to do yourself harm.

“We believe that things will start to slow,” he tells The Edge in an exclusive interview. “This year, a lot of our focus really is on getting more efficiencies in productivity, in people, in our cost and capital base. Part of this led to the reorganisation. It is a reorganisation that tries to address, frankly, multiple things at the same time and underlying it all, we believe that it will create additional shareholder value.”

Despite the tougher operating environment, Kam stresses that RHB Cap’s IGNITE 2017 transformation vision is “very much on track”. “The one major outcome that I have guided to the market that will change is how aggressive we will be in overseas expansion,” he says, adding that the target for overseas contribution by 2017 will be revised to 20%, rather than 30%, of group revenue.

“The focus [on expanding overseas] will be on a less capital-intensive route. There is a possibility that the investment bank will be used to spearhead that. A regional network makes the most sense for our investment banking platform to capitalise on flows. In our mind, it doesn’t make sense to push for 30% in the current environment,” Kam says, adding that the two missing markets are Indonesia and the Philippines (see Q&A on Page 64).

On the reorganisation, Kam says the recent changes in the industry and the regulations — such as consolidated capital ratios under the new Financial Services Act 2013 — have made the current structure of the group inefficient.

Thus, the group is undertaking an internal restructuring and a rights issue that will result in the banking business — RHB Bank Bhd — taking over the listing status of RHB Cap. The proposed rights issue of new shares is expected to raise up to RM2.5 billion.

Following this, the group is expected to see interest savings of RM150 million and tax savings of RM35 million to RM40 million. All of the earnings uplift will be on a smaller book value, resulting in an increase in return on equity (ROE). The group’s common equity Tier 1 (CET1) ratio is expected to increase to at least 11% from the current 9% while earnings per share is expected to be diluted by between 10% and 30%. Credit Suisse Research expects ROE to improve to 12.1% to 14.3% versus 10.8% to 12.2% under the current holding company structure.

“Firstly, we are moving the efficiencies up. Secondly, the holding company discount has been removed, so we bring our shareholders directly into the banking group. And thirdly, there are efficiencies because of a better credit rating. Holding companies are always rated differently from the actual operating companies. In our case, the bank is rated AA and the holding company an A — one notch down. With the reorganisation, the actual borrowing and expansion vehicle is an AA company. It’s a much stronger company. So, when it comes to borrowing and expansion, you [will] see all these savings,” Kam explains.

“And when we raise RM2.5 billion, the book value of the new listed entity is actually lower because we have eliminated part of the goodwill that sits at RHB Cap. Most rights issues will see a dilution in ROE because the shareholders’ funds go up and ROE goes down. But in our case, because of how it is structured, the ROE goes up.”

This, Kam says, is why a re-rating of the new listed entity’s stock makes sense. “If you think about it, it has stronger ROE than the preceding company. It is a stronger credit-rated company and there is no holding company, so you are directly sitting with the bank operating company itself. So, if you look at it from all perspectives, from the shareholders’ perspective, it makes perfect sense. From an expansion standpoint, to have a bank, as opposed to a holding company, spearhead the expansion as we go out into the region also makes perfect sense.”

RHB Cap — a takeover target

RHB Cap was the result of a merger of banks that included Kwong Yik Bank Bhd, DCB Bank Bhd, Sime Bank Bhd and Utama Banking Group.

It was a takeover target because of its vulnerability then — it was left with heavy debts and had to be restructured after sinking into a sea of red with losses reaching hundreds of million ringgit during the 1997/98 Asian financial crisis.

The banking group has been restructured and strengthened since 2007, when the Employees Provident Fund (EPF) emerged as the single largest shareholder of RHB Cap after winning a bidding war. It beat rival buyers EON Capital Bhd and a Kuwait Finance House-led consortium. The retirement fund’s

RM2.25 billion cash offer to raise its holding in the RHB group later resulted in a couple of corporate exercises as it had to pare down its 82% stake. As a result, the EPF sold a 25% stake to Abu Dhabi Commercial Bank in 2008. This stake was later sold to Aabar Investments PJSC. The EPF has a 41.3% stake in RHB Cap today while Aabar holds 21.4% and OSK Holdings Bhd 9.9%.

In recent years, RHB Cap has seen a couple of attempted takeovers — by Malayan Banking Bhd and CIMB Group Holdings Bhd in 2011 and by CIMB again last year.

RHB Cap itself went on an acquisition drive, buying OSK Investment Bank for RM1.95 billion in 2012. This gave it the regional platform it was looking for. RHB Cap gained immediate access to the equity, investment banking and fund management businesses in Singapore, Hong Kong, China, Thailand and Indonesia. On top of that, it has equity and investment banking operations as well as a full-fledged commercial bank in Cambodia.

Since its restructuring in 2007 and the slew of corporate exercises, the fourth largest local banking group has been steadily strengthening its position, as indicated by its improved earnings performance.

From a net profit of RM316 million in FY2005, RHB Cap saw its bottom line increase to RM2.04 billion in FY2014. Its asset base of RM89.9 billion in 2005 expanded to RM219.3 billion in 2014.

Kam, who had joined the group 13 years ago, has seen at least three takeover attempts and a couple of restructuring and merger exercises.

“RHB is probably one of the [few] companies that have seen so many major events in that span of time in Corporate Malaysia. Some companies go through big events and don’t survive — they end up being taken over or bailed out. Now, RHB has gone through crisis after crisis after crisis. And because of that, the team and some board members who have been through it all with us have a strong bond,” he says, adding that the events did not only affect the top people but everyone in the group.

“In a way, we’ve gone through a lot, with five to six major events in the space of seven to eight years. That’s an event every 1½ years. We engage with the team. We want to have this shared vision and passion to make the company better and better. The one thing we pride ourselves on is that the senior team believes in this shared ambition and passion and the growth of the group [as well] … [It is] not just spearheaded at the senior level. We are open to talking to anyone in the group.”

Kam proudly adds that the group’s performance has not dipped despite the takeover attempts, which can be distracting. “We have had an unbroken profit growth track record for the last 10 years in spite of what has been happening. Sometimes, people don’t give the group enough credit because they compare us with companies that are on a steady path, those that did not have to worry about [takeover attempts]. For RHB, it is always about consistency.”

An analyst with a local bank-backed research house says RHB Cap has done well despite the distractions and changes in top management over the years. “They should continue to do well this year. They were without a full management team over the past years but were still able to generate results, which picked up momentum when they got a full team on board at the end of 2013.

“Despite the merger distraction last year and given the fact that the IGNITE 2017 strategy — which provides greater focus for the group — was just introduced in the first quarter of 2014, the group has done pretty well. They also introduced the CONNECT strategy last August, which is aimed at motivating and empowering internal personnel, especially at the branch level. Productivity levels have improved because of it,” he says.

Another banking analyst with a foreign bank says he thinks that operationally, things are going well for the group. “They seem to be gaining market share despite the distractions. The team seems to be working quite well together. On the investment banking side, the merger with OSK seems to have worked out quite well. The group did very well last year … they have been gaining market share in loans and deposits. The only area where there is concern is margins … they need to try and control the drop. Their margins are a little bit lower than the industry average and that is why they are focusing on the small and medium enterprise side.”

Kam shares that the group’s strategies have always been premised on laying the foundations for future growth as well as building a strong team and a solid succession plan.

“The team is very much intact [to ensure a smooth transition],” he says, referencing his exit from the group on May 4.

“I literally grew up here,” reflects Kam. “Thirteen years. Some people work longer in organisations but I literally grew up here. The people who brought me in gave me the opportunities.

“It wouldn’t be for any other reason than the fact that I think at this stage, it deserves a better person than me, from the standpoint that I am feeling tired. That is what I told the board. If I could still progress at the pace that I believe the company needs, I would stay. But I believe we have built a very strong team. We have a fantastic roadmap.

“And I always say that when my team is moving faster than I am, then I need to let the team move ahead.”

This article first appeared in The Edge Malaysia Weekly, on April 27 - May 3, 2015.

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