This article first appeared in The Edge Malaysia Weekly on December 19, 2022 - December 25, 2022
INHERITANCE and succession planning is difficult even in the simplest form of family business. It gets more complicated when it involves regulated businesses such as banks.
The late Tan Sri Teh Hong Piow will go down in history as among the greatest bankers in Malaysia. But with his passing, all eyes are on how his 23.4% block in Public Bank Bhd that is worth close to RM20 billion at the current price, would be passed on to his heirs and what that would mean for the future franchise value of the bank.
That block is held mainly (22.77%) via Consolidated Teh Holdings Sdn Bhd. According to Companies Commission of Malaysia (SSM) records, Teh himself held all the shares in Consolidated, except one held by a Tay Mui Leng. The two of them, together with his youngest daughter Diona Teh Li Shian, are directors of Consolidated.
Teh has three other children — William Teh Lee Pang, Lillian Teh Li Ming and Dr Lillyn Teh Li Hua. His wife, Puan Sri Tay Sock Noy, passed away in August this year.
Public Bank opened its first branch in 1966 when Teh was just 36 and he managed it until 2002, when he left the group managing director/CEO position to Tan Sri Tay Ah Lek. Teh became chairman of Public Bank and eventually retired in 2018 and assumed the honorary title of founder/emeritus chairman.
There are no immediate concerns, however, about the operations of the bank, which are in the capable hands of Tay and the board of directors and management. Indeed, day-to-day operations had been left to Tay even before he assumed the post of CEO. The bank has continued to provide a sterling set of returns for shareholders.
Still, Teh’s death has left a nagging question as to how his 23.4% interest in the banking group will be passed on. None of his children are in the business.
Even if they were working and involved in Public Bank, the entire block cannot be passed on to them, according to the current set of rules, unless given exemption. This is because there are rules that limit individual and institutional shareholding in a banking institution.
According to the Financial Services Act 2013 (FSA), an individual can hold only 5% in a bank. The individual’s interest can go up to 10% with approval from Bank Negara Malaysia. As for institutional investors, the limit of shareholding is capped at 20%. Anything more will require Bank Negara approval.
Teh was allowed to hold 23.4%, which is way above the threshold of 10%, because of the “grandfather rule”. Under the rule, those who already had an interest exceeding the threshold when the FSA came into effect in 2013 do not need to comply with it.
Apart from Teh, two other individuals holding more than 10% in a banking group are Tan Sri Quek Leng Chan of the Hong Leong Financial Group and Tan Sri Azman Hashim of AmBank Group. Quek holds 62% in the banking group while Azman has 11.83%, the second-largest shareholder after Australia New Zealand Banking group, which holds the biggest block of 21.68% in Ambank.
Under the Banking and Financial Institutions Act 1989, which was in effect before the FSA, Teh, Quek and Azman were exempt from complying with the shareholding rules. Bank Negara has made it clear that the “grandfather rule” applies only to these individuals and cannot be passed on to their heirs. According to an investment banker, the block cannot even be transferred to a trust without the central bank’s approval.
Therefore, how Teh’s 23.4% block in Public Bank is passed on or distributed will be closely watched. The template will provide clues as to how Quek and, to a lesser extent, Azman will pass on their shareholding in their banks.
Generally, Bank Negara does not interfere when it comes to individuals holding a stake of up to 5% in a bank. If they end up owning more than that, the individual needs to pass a “fit and proper” test, which is where the central bank plays a bigger role in determining whether an exemption can be granted.
The same applies to institutions. If they are to hold an interest of more than 20%, the central bank will assess their suitability in leading the bank.
In recent history, there was an incident in which Bank Negara was seen as exerting control on the appointment and executive powers granted to an individual, who was also a major shareholder, in a bank. The issue was resolved when there was a change in shareholding.
As for institutions, Bank Negara in general does not approve of private equity funds taking up major stakes in banks. This is based on the belief that such funds are not long-term shareholders and will tend to liquidate their position after a few years.
Thus, Bank Negara does not encourage banks to have private equity funds as major shareholders with a stake of more than 10%.
Case in point: When Primus Capital Partners became a shareholder in EON Bank in 2007, there was a boardroom battle, as some shareholders of the bank wanted to sell out. Eventually, Primus sold to Hong Leong Bank, with the merger receiving speedy approval from Bank Negara.
The most recent case of a major block being broken up with Bank Negara’s approval involved Langkah Bahagia Sdn Bhd’s interest in Alliance Bank.
Langkah Bahagia, a vehicle linked to former finance minister Tun Daim Zainuddin, had a 51% stake in Vertical Theme Sdn Bhd, which held 29.06% interest in Alliance Financial Group (AFG). The other 49% in Vertical Theme was held indirectly by Singapore’s Temasek Holdings. Thus, Langkah Bahagia’s effective interest in AFG was just below 15%.
In April 2016, three individuals — Ong Beng Seng, Ong Tiong Sin and Seow Lun Hoo — emerged as owners of Langkah Bahagia. As their shareholding would have been less than 5% each, the acquisition would not have required Bank Negara approval.
Beng Seng is a famous hotelier while Tiong Sin and Seow are known for their expertise in the investment banking space. As such, all three would have passed the “fit and proper” test. In addition, the central bank would have been satisfied that the three were not parties acting in concert.
It would be naïve for anyone to assume that Teh did not plan for the passing-on of his block in Public Bank to his heirs. Being a disciplined banker with an astounding vision and perseverance, he surely would have hired the best brains to deal with the matter.
He would have known that Bank Negara could give exemptions on a case-by-case basis. The laws allow for the Minister of Finance to sign off exemptions upon the advice of Bank Negara. The finance minister is Datuk Seri Anwar Ibrahim, who is also the prime minister.
Anwar knows the importance of keeping a bank’s franchise value intact. After he was forced out of office and thrown into jail in 1998, the Tun Dr Mahathir Mohamad government forced a consolidation of banks. It was led by Daim, who returned to the government in 1999.
Banks with good franchise value were forced into shotgun marriages. The exercise did not earn the Mahathir government brownie points and was said to have been a reason for Daim’s departure in 2001.
Public Bank’s business model of low-risk lending to the masses and small and medium enterprises has produced splendid results. That is why it commands a price-to-book valuation of 1.7 times, which makes it the most expensive bank in the local scene and higher than most financial institutions in the region.
On that score, the handling of Teh’s 23.4% stake in the bank will be sorted out by his family and Bank Negara and will in no way erode its franchise value if there is continuity in its management.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's App Store and Android's Google Play.