This article first appeared in Corporate, The Edge Malaysia Weekly, on April 18 - 24, 2016.

THE recent shareholding changes at Alliance Financial Group Bhd (AFG) has certainly sparked excitement. Scenarios and theories abound as to what could be next for the banking group. Against this backdrop, there is growing speculation that there will be another round of consolidation for the banking industry, as The Edge had reported in 2014.

Bankers and analysts who follow AFG closely believe that it could be easier for the group to develop forward-looking growth strategies now.

“It finally happened. It was known in the market that one major shareholder wanted to cash out, while the other wanted to stay,” says a banking analyst who covers the stock.

Meanwhile, a senior banker who used to work at AFG notes: “Previously, it was difficult for the management to put in place expansion plans or do certain things such as investing for growth because the two major substantial shareholders were not always on the same page on them. There is optimism that the current major shareholder — Temasek Holdings Private Limited — and the new ones will be on the same page more often than not.”

This “optimism” is fuelled by the fact that Temasek has crossed paths with two of the new substantial shareholders, Ong Beng Seng and Ong Tiong Sin. Beng Seng,  Tiong Sin and Seow Lun Hoo acquired the entire shareholding of Lutfiah Ismail, a close associate of former finance minister Tun Daim Zainuddin, in AFG.

Beng Seng, a hotelier in Singapore,  has partnered Temasek to acquire properties in London. Tiong Sin, who is better known as Richard Ong, is CEO and co-founder of RRJ Capital. It is said that Temasek has invested nearly US$1 billion in the investment firm. The two companies are co-investors in several ventures in China. Tiong Sin’s brother Charles, also a co-founder of RRJ Capital, was Temasek’s head of investment for over 10 years. Seow controls the Newfields Group, a boutique corporate advisory outfit.

According to announcements on Bursa Malaysia on April 8, Beng Seng, Tiong Sin and Seow bought the entire equity interest in Langkah Bahagia Sdn Bhd, which holds a 51% stake in Vertical Theme Sdn Bhd, which in turn has a 29.06% stake in AFG.

Singapore’s state-controlled sovereign wealth fund Temasek, through its unit Duxton Investments Pte Ltd, holds the remaining 49% in Vertical Theme.

The trio’s equity interest in Langkah Bahagia now stands at an effective 14.8% stake in AFG. This means that Temasek and the three individuals collectively own a 29.06% stake in AFG. The price of the recent share sale remains unknown.

The Edge, quoting sources, wrote in September 2014 that Singapore parties linked to Temasek were interested in acquiring the equity stake in Langkah Bahagia, but the stumbling block was pricing. AFG’s 52-week average price in 2014 was RM4.42. The stock hit a five-year high of RM5.105 on July 5, 2013.

AFG’s share price has been on upward trend recently. From a low of RM3.07 in late January, it jumped 39% in just three months to RM4.26 on April 13 — the highest since last July.

Potential partners may include DBS, AMMB and RHB

Potential partners for AFG include DBS Group Holdings Ltd, AMMB Holdings Bhd and RHB Capital Bhd, industry observers say.

Some banking analysts believe the recent shareholding changes could pave the way for Singaporean banking group DBS Bank Ltd to acquire a meaningful stake in AFG. Temasek is the single largest shareholder of DBS.

“Although our latest channel checks with DBS’ management suggest that they are unaware of any corporate development relating to AFG, on a more exciting M&A path, we believe that the market could potentially revisit the prospects of the potential entry of DBS Bank Ltd. Recall that DBS had sought approval from Bank Negara to start negotiations to acquire Duxton Investment’s 49% shareholding in Vertical Theme back in April 2012. Unfortunately, the inability to seek a reciprocal understanding/approval for DBS to own a 100% stake in AFG may have been a key stumbling block,” notes UOB Kay Hian Research in an April 13 note.

In August 2012, The Edge wrote about industry speculation that DBS could enter the Malaysian market by acquiring the RHB banking group through related parties. Temasek and RHB’s substantial shareholder — the Employees Provident Fund (EPF) — would have ended up holding stakes in the parent company of the merged banks. This would result in a win-win for everyone. The EPF has a 16.32% stake in AFG and 41.79% in RHB.

The plan fell through but industry observers say it could be re-explored with the latest developments at AFG.

“RHB’s valuations are attractive now and given the fact that Aabar [Investments PJS] did not subscribe to RHB’s rights issue a few months ago, some believe it could be looking for an exit,” says an industry observer.

Another observer points out that with AMMB Holdings’ major shareholders looking to sell, it could end up in a tie-up or M&A with AFG. “Everybody knows the ANZ [Australia and New Zealand Banking Group Ltd] wants to exit … It is a matter of price and finding a buyer,” says a banker.

When asked if it was in talks to sell its stake in AMMB, the Australian lending group said in an email reply on March 11 that it does not comment on M&As.

ANZ’s interest in divesting its stake in AMMB is not new. In 2014, The Edge had reported that investment bankers were looking for prospective buyers. As at June 30, 2015, ANZ held a 23.78% stake in AMMB.

ANZ bought into AMMB in 2006 at an average price of RM3.625 per share. It obtained a 24.9% stake in two separate tranches. The stock dipped to a 10-year low of RM1.569 on Oct 28, 2008, and touched a 10-year high of RM7.18 on Aug 13, 2013. It has since declined, closing at RM4.56 last Wednesday.

Meanwhile, UOB Kay Hian Research points out that the new owners of the 51% stake in Vertical Theme could be purely passive investors whose acquisition will not trigger a general offer (GO). “Even if the new shareholders were to dispose of their respective stakes to a new strategic shareholder, it is unlikely to trigger a GO given the size of the stake and Bank Negara Malaysia’s 30% cap on foreign shareholding. As AFG has a team of professional managers with strong management influence from Temasek, we think that it will broadly be business as usual in terms of overall strategic direction, if such a scenario were to pan out. We would then advise investors to take profit as operational fundamentals remain unchanged,” it states.

In April 2009, Bank Negara eased foreign ownership limits for non-commercial banks. The limit for investment banks, Islamic banks and takaful operators was raised to 70% from 49%.

In early 2010, Prime Minister Datuk Seri Najib Razak said in Australia that Malaysia was ready to relax its bank ownership rules, whereby foreign ownership of local financial institutions could breach the 30% limit. On March 9 of the same year, Najib said that Bank Negara would look at the merits of allowing larger foreign ownership in local banks on a “case-by-case basis”. 

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