This article first appeared in The Edge Malaysia Weekly, on January 18 -  24, 2016

HONG Leong Group’s Tan Sri Quek Leng Chan has a minority stake in RHB Capital Bhd now.

The equity interest held by the tycoon is about 2%, according to industry sources. The shareholding is rather small and below the substantial shareholder threshold of 5%, but it has drawn some attention in the inner circle of the banking industry — that the controlling shareholder of Hong Leong Bank Bhd is holding a stake in its rival.

However, a source familiar with Hong Leong Group downplays the news. “There is nothing to it. Don’t read too much into it. There are no plans on the table for a merger, takeover or anything of that sort,” says the source.

It is not known how exactly Quek acquired the stake but industry sources believe he could have bought rights entitlements and subscribed for RHB Capital’s shares at RM4.82 apiece, which was at a 7.48% discount to last Friday’s closing price of RM5.21.

Coincidentally, Aabar Investment PJS did not subscribe for the rights issue, which was expected by many in the banking industry as Bank Negara Malaysia had said the Abu Dhabi-based fund could not exercise its rights beyond 15% equity interest.

Aabar had paid an expensive price of RM10.80 per share in 2011 — 2.25 times book value — to take over its existing block of shares from its sister company, Abu Dhabi Commercial Bank. The price of the stock has since dropped, to RM5.25 last Thursday. Based on last Friday’s closing of RM5.21, RHB Capital was trading at 34% below its net asset value per share of RM7.94 as at Sept 30, 2015.

According to investment bankers involved in RHB Capital’s rights issue, the holdings of substantial shareholders after the cash call are 42.25% (41.58% previously) for the Employees Provident Fund, 10.13% (9.97% previously) for OSK Holdings Bhd and 17.75% (21.09% previously) for Aabar.

Interestingly, industry sources say as OSK’s stake has crossed the 10% mark due to the rights issue and the company has to obtain Bank Negara’s approval for that, there is an option for OSK to increase it to 14.99%.

“There is that option as every 5% mark in a shareholding in a bank needs Bank Negara’s approval ... but it is uncertain if OSK will up its shareholding in RHB [Capital],” says a source familiar with the matter.

RHB Capital’s rights issue last year was aimed at strengthening its capitalisation to meet the requirements of Basel III and support the group’s business growth. The rights shares were listed on Bursa Malaysia on Dec 21, 2015. The exercise saw an oversubscription rate of 30.47% and raised about RM2.5 billion.

Last month, AmResearch upgraded its rating on the stock to a “buy” from a “hold”. It also raised its fair value to RM7 per share from RM6.30.

In a Dec 4 research report, AmResearch notes that the fair value is based on a better FY2016 return on equity of 10.1% (9.6% previously) for the new RHB Bank that will take over the listing status of RHB Capital. “This leads to a higher fair 

P/BV (price-to-book value) of 0.97 times (from 0.9 times) and a higher fair value of RM5.41 per RHB Bank share (previously RM4.90).”

The research house adds that as concerns dissipate, it expects the catalysts to include the removal of uncertainty over the number of rights shares to be issued and confirmation of the sufficiency of the bank-level fully loaded CET1 ratio.

“Given the fall in the share price over the past few months, the stock is currently trading at a compelling depressed crisis valuation of 0.8 times FY2016F,” AmResearch notes. At the time, RHB Capital’s shares were trading at RM5.92.

“This is similar to the valuation during the 1997/98 [Asian financial] crisis and the 2008 global financial crisis. At the current level, we believe it has priced in a potential jump in impaired loans and credit costs.”

For the nine months ended Sept 30, 2015, RHB Capital posted a 22.9% drop in net profit to 

RM1.195 billion from a year earlier on lower non-interest income as the group registered downsizing costs and higher operating expenses.

Excluding the expenses incurred by the downsizing programme — known as a career transition scheme (CTS) — of RM308.8 million, the group’s net profit came to RM1.427 billion, a decrease of 8% from the previous corresponding period. Normalised pre-tax profit was RM1.94 billion, 7.2% lower year on year. Revenue also shrank 5.3% to RM7.978 billion.

The group says the decline in earnings was due to lower investment banking-related income and trading income and higher operating expenses.

“The group expected 2015 to be challenging and focused on maintaining asset quality and improving operational efficiency,” RHB Capital noted last November.

The operating environment for the banking industry is indeed tough and RHB Capital has not been spared from the turbulent ride.

It will be interesting to see how the group navigates the choppy waters with its added cash pile, internal restructuring and major shareholding changes.

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