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This article first appeared in Corporate, The Edge Malaysia Weekly, on May 2 - 8, 2016.

 

AT least three foreign private equity (PE) firms — TPG Capital, KKR and CVC Capital Partners — have expressed interest in acquiring Australia and New Zealand Banking Group Ltd’s (ANZ) 23.78% stake in AMMB Holdings Bhd, sources say.

It is understood that the parties are talking to Tan Sri Azman Hashim, chairman and major shareholder of AMMB, about the matter and are waiting for ANZ to revert on their interest.

“Azman has a big say on who comes in because he has the first right of refusal [on ANZ’s stake]. That’s why the PE firms are going through him,” a source familiar with the matter tells The Edge.

Azman, who has 12.97% equity interest in AMMB held through Amcorp Group Bhd, is not currently looking to increase his own holding and could recommend a suitable partner for the country’s sixth largest banking group by assets, the source says.

As the single largest shareholder, ANZ’s 23.78% stake is valued at RM3.25 billion based on AMMB’s share price close last Friday of RM4.53 a share. The next largest shareholder is the Employees Provident Fund (15.01%), followed by Azman.

While ANZ has not publicly said that it is mulling selling its stake in AMMB, news reports about the matter have intensified in recent months. For one, ANZ’s new CEO, Shayne Elliott, who took the helm this year, is stepping up efforts to divest some of its minority stakes in Asian banks to avoid extra capital charges under tougher Basel III rules. ANZ’s 23.78% holding in AMMB is considered a minority stake.

For another, stakeholders in Australia are questioning ANZ on governance issues following news reports of alleged transfers of more than US$1 billion into Prime Minister Datuk Seri Najib Razak’s accounts at AMMB, said to be from embattled state-owned 1Malaysia Development Bhd or related entities. (Malaysia’s Attorney-General has since said the funds were a donation from Saudi Arabia’s royal family.)

“ANZ may be keeping its head low for now, but it’s definitely under pressure to sell,” an industry source remarks.

A local daily reported last Monday that US-based TPG was courting Azman for the ANZ stake.

While it is early days yet, industry observers and analysts say it would be interesting to see if Bank Negara Malaysia would be open to allowing a PE firm to acquire a strategic stake in a local banking group.

Hong Kong-based Primus Pacific Partners was the last PE firm to buy a strategic stake in a banking group, EON Capital Bhd (EONCap), in 2007.

EONCap was acquired by Hong Leong Bank Bhd in 2011 following a long-drawn-out tussle. Despite having started negotiations for a merger in late 2009, the two banks could not seal a deal until much later as Primus — which would have faced a significant loss on its investment had a deal gone through — went all out to block it, including filing a lawsuit claiming that a takeover was illegal.

That episode took a toll on EONCap and is understood to have made Bank Negara think twice about letting PE firms take major stakes in local banking groups.

“The thing about PE funds is that they have a limited investment horizon, which could be destabilising for the other investors of the bank when they want to exit. There are also questions as to what value a PE fund can bring to the table,” an analyst remarks.

Most PE firms typically have an investment horizon of up to seven years before they exit, but this is not carved in stone, a senior executive at a PE firm stresses. “You also can’t presume that every PE fund is like Primus. Some have good experience in banking and have held banks in the region for a long time and have a deep bench of people who can bring the bank to the next level.”

Of the three PE funds said to be keen on ANZ’s stake, TPG seems to have the most investments in financial services companies in the region. Its website shows that its portfolio of investments include Bank Tabungan Pensiunan Nasional and BFI Finance in Indonesia, China International Capital Corp Ltd, Janalakshmi Financial Services in India and Union Bank of Colombo in Sri Lanka.

Apart from PE firms, industry sources say a few foreign banks, including Chinese and Japanese ones, had previously shown interest in ANZ’s stake in AMMB but did not press on with it.

Analysts say it does not make sense for a bank to hold a minority stake in another lender as it would be an expensive affair. Under stricter Basel III rules, they would be required to set aside equity capital against such investments.

They note that AMMB’s common equity Tier-1 (CET-1) ratio at 10.8% as at Dec 31, 2015, is lower than the industry’s average of about 12.8%.

Analysts say Bank Negara, in support of industry consolidation, is likely to prefer merger and acquisition (M&A) moves that would lead to a merger, rather than just a shift in shareholding.

Digital Edge Weekly reported last July that high-level discussions for a potential merger between AMMB and RHB Capital Bhd had been held, but had to be put on hold due to political headwinds.

This was shortly after The Wall Street Journal first reported alleged transfers of substantial funds from entities linked to 1MDB into bank accounts in AMMB under Najib’s name. Later in November, AMMB was slapped with a RM53.7 million penalty by the central bank for non-compliance with certain regulations.

A key issue in whether ANZ would consider selling its stake would be pricing, analysts say. ANZ first became a shareholder in AMMB almost 10 years ago in 2006 — interestingly, it beat TPG to the stake in a bidding war — paying an average of RM3.63 a share for the stake, over two tranches. This worked out to a price-to-book (PB) value of 1.96 times, which was in line with M&A norms of about 1.9 times for Malaysian banks at the time.

“But that’s not the case anymore. Any stake sale now will probably be significantly lower than 1.9 times PB, with ROEs (return on equity) having come down from then, among other things. Around one times book value now might be fair … but will ANZ accept it?” asks a senior banking analyst, who pegs AMMB’s fair value at around RM5 a share. 

 

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