This article first appeared in The Edge Malaysia Weekly on September 16, 2019 - September 22, 2019
AT least three foreign parties and a local investment bank — said to be Kenanga Investment Bank Bhd — have shown interest in acquiring Alliance Investment Bank Bhd (AIB), sources say.
AIB is the investment banking arm of Alliance Bank Malaysia Bhd, the country’s smallest banking group.
Alliance Bank is understood to be exploring options for AIB, which include an outright sale or a paring of its ownership in the investment bank.
“They’ve hired an adviser to gauge interest. There are at least four parties that have indicated interest, but it is still early days,” a source familiar with the matter tells The Edge. The bank’s preliminary move to gauge interest for AIB may not necessarily lead to a sale.
When contacted for comment, Alliance Bank repeated what it said in a stock exchange filing about two months ago after news first emerged that it may be exploring a stake sale.
“As part of Alliance Bank’s ordinary course of business, it constantly explores strategic options to maximise shareholder returns,” it says. It adds that it remains focused on accelerating the momentum of its core businesses in the consumer and SME (small and medium enterprise) segments.
Analysts note that in recent years, a number of Japanese investment banks have been looking to expand in the region through strategic acquisitions, and may be keen on AIB.
Recall that in mid-2015, Daiwa Securities Group Inc tried to acquire a minority stake in Affin Hwang Investment Bank Bhd. The parties, however, failed to reach a deal within the stipulated deadline set by Bank Negara Malaysia, after about 20 months of talks.
Analysts are surprised that Kenanga may be keen on AIB, pointing out that there is not much value in an investment bank buying another in these times. It is, nevertheless, one of few investment banks that have been on an acquisition mode in recent years. In December 2012, Kenanga expanded by acquiring rival ECM Libra Investment Bank Bhd for RM875.1 million. And, two months ago, it bought fund management firm Libra Invest Bhd for RM50.1 million. Last year, it attempted to buy stockbroker Inter-Pacific Securities Sdn Bhd.
Top officials from Kenanga could not immediately be reached for comment.
Alliance Bank’s move to explore options for AIB, one of the smaller investment banks at home, comes at a time of increasingly intense competition in the industry. Capital markets have been weak for a while now and even big regional investment banks such as Maybank Investment Bank Bhd and CIMB Investment Bank Bhd are grappling with fewer equity-related deals and weak brokerage income.
With a small net profit of RM1.36 million in the financial year ended March 31, 2019 (FY2019), AIB’s earnings contribution to its parent company is marginal. For perspective, SME-focused Alliance Bank’s net profit in FY2019 stood at RM537.6 million.
“The disposal of a majority stake in AlB would allow the group to focus its efforts and resources on better yielding businesses with higher returns,” Maybank Investment Bank Research says in a July 15 report.
In a market where all eight local banking groups have investment banking outfits, it may be better for Alliance Bank to find a joint-venture (JV) partner for AIB than sell it off whole, analysts say.
“Investment banking is a highly competitive, high-cost business and the smaller banks just don’t have the capacity to take on the more sizeable deals. I think it would be nice to have a debt capital market or corporate finance team to help you with some of your deals, but generally, if you don’t have much coming your way, which seems to be the case with AIB, it may be better to get rid of it than carry the high cost of the outfit. But a JV could be a better option, to share the costs of running AIB,” says one analyst.
When the tide turns in the capital markets, the business could provide some upside to the group, he points out. A JV with a foreign party could also be an opportunity for AIB to extend its reach and product expertise.
The last investment banking M&A in Malaysia was in April 2014, when Affin Holdings Bhd acquired Hwang-DBS Investment Bank Bhd for RM1.09 billion, or 1.28 times the latter’s book value.
AIB’s net profit of RM1.36 million in FY2019 was sizeably lower than the RM21.75 million it made a year earlier, mainly due to allowance for expected credit losses (ECL) on financial instruments and for impairment losses on non-financial assets that year, totalling RM24.12 million. Its operating profit before allowance grew about 9% to RM31.14 million.
In the first quarter of FY2020 (1QFY2020), AIB slipped to a net loss of RM11.02 million compared with a profit of RM5.79 million in the previous corresponding period, because of higher allowance for ECL on financial instruments of RM24.67 million against a writeback of RM86,000 in the year-ago period.
Alliance Bank too had a tough 1QFY2020, with net profit at RM76.69 million, down 43.8% y-o-y and 31.4% q-o-q, due to credit losses stemming from impairment of several large accounts, and continued investment in the group’s IT infrastructure under its transformation initiatives.
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