KUALA LUMPUR: Alliance Financial Group Bhd (AFG), the smallest of the country’s eight banking groups, is attracting interest as investors begin to appreciate its low price-to-book valuations.

AFG’s shares have surged over 12% the past two days, just as one of its major shareholders Temasek Holdings Pte Ltd, said it was rebalancing its portfolio, which sparked speculation of potential mergers and acquisitions M&A.

The Singapore-owned investment company, which announced a major real estate tie-up with its Malaysian counterpart Khazanah Nasional Bhd last Wednesday, raised US$3.63 billion (RM10.9 billion) by selling some of its shares in China Construction Bank and Bank of China — China’s No 2 and No 3 lenders by asset size.

AFG rose as much as 8.45% intra-day yesterday on heavy trading before closing at a four-year high of RM3.62, up 5.54% for the day. That followed a 6.52% gain on Wednesday. Yesterday’s gains placed AFG among Bursa Malaysia’s top three gainers.

Has the market caught a whiff of something brewing at the niche lender, which is effectively 29.06%-owned by Temasek? Or are investors merely taking a bet that something is about to make AFG shares worth more?

After all, while the 40.87 million shares done the past two days were only about 2.64% of AFG’s share base, the stock has gained close to 17% over the past 10 days.

Even after the gains, AFG is trading at 1.67 times its book value of RM2.17 a share at current levels.

Besides the Employees Provident Fund Board, which filings show has been taking some profit, there is believed to be at least one other willing seller. In February, The Edge weekly reported that Langkah Bahagia Sdn Bhd — a vehicle believed to be linked to former finance minister Tun Daim Zainuddin — was looking to sell its entire 14.8% effective stake in AFG, held through Vertical Theme Sdn Bhd. Parties related to Temasek, which owns 49% of Vertical Theme, had been offered the stake, the article quoted unnamed sources as saying.

It is unclear if Temasek is interested in upping or divesting its stake in AFG, notwithstanding Bank Negara Malaysia’s rules on foreign ownership of banks.

However, it is worth noting that the premium for Malaysian banks has gone up a notch after the recent aborted takeover bids by Malayan Banking Bhd and CIMB Group Holdings Bhd for RHB Capital Bhd.

Expectations of a deal being done at a sizeable premium sent RHBCap shares as high as RM10.40 intra-day on June 1, a level not seen since the 1997 Asian financial crisis.

While EON Capital Bhd, whose sale was negotiated well over a year ago, was sold for 1.4 times book, the suitors eyeing RHBCap were believed to be willing to pay about two times book.

However, the deal was scuttled after Aabar Investments, the investment arm of the Abu Dhabi government, paid RM10.80 apiece or 2.25 times book, for the 25% block in RHBCap held by Abu Dhabi Commercial Bank (ADCB).

Is two times book now seen as a new benchmark for Malaysian banks? Analysts differ, with some saying smaller banks that are left alone will command lower valuations while those seen as having M&A potential will see higher valuations.

“Take Affin Holdings as an example ... it is highly unlikely LTAT (the Armed Forces Pension Fund) will ever want to sell its prized stake. So the stock is likely to trade at relatively lower price-to-book valuations,” an analyst said, noting that Affin had decided instead to rope in a strategic partner in the Bank of East Asia.  

Some smaller players may see a premium if the big banks see it as an easier way to gain scale, the analyst added.

Indeed, RHBCap, the country’s fifth largest banking group, had seen its share price languish for such a long time that ADCB’s investment was “underwater” for many years.  

It started to gain attention when Maybank and CIMB realised that an acquisition of RHBCap would have propelled them to the top league not just in Malaysia, but also Southeast Asia.

In retrospect, AFG was last in the limelight in the early part of last year due to the spat between its former CEO Datuk Bridget Lai and the board. The bank has since stayed largely under the radar with new group CEO Sng Seow Wah at the helm.

It is said that AFG has gone through a paradigm shift from loan-centric to placing more emphasis on developing non-interest income under its new Singaporean CEO.

This article appeared in The Edge Financial Daily, July 8, 2011.