ASIAN Finance Bank (AFB), a Middle Eastern-owned Islamic bank in Malaysia, is in talks to be taken over by Malaysian Industrial Development Finance Bhd (MIDF), sources say.

The two unlisted financial entities are expected to close a deal soon.

“The talks have been going on for some time now. They’re close to signing something,” one of the sources tells digitaledge Weekly.

AFB is one of three foreign banks — the other being Kuwait Finance House (M) Bhd (KFH) and Saudi Arabia’s Al Rajhi Banking & Investment Corp (M) Bhd — that Bank Negara Malaysia gave an Islamic banking licence to in the mid-2000s.

It had been making annual losses for the most part since it began operations in 2007, but managed to swing to a net profit of RM7.57 million in the year ended Dec 31, 2013 (FY2013), which then almost doubled to RM14.98 million in FY2014.

Industry sources say AFB had been looking for a buyer since last year. Prior to MIDF, AFB had informally approached a number of lenders, including Malaysia Building Society Bhd and some Japanese banks here, but to no avail.

MIDF’s interest in AFB lies in the fact that the latter is an Islamic commercial bank. AFB’s principal business includes corporate and retail banking.

“MIDF cannot take retail deposits,

whereas AFB can, so acquiring it will enable MIDF to have Islamic retail banking operations,” remarks an analyst.

AFB, however, has only two branches, in Kuala Lumpur and Johor Baru, and a representative office in Jakarta, Indonesia.

MIDF is a financial services provider that is wholly owned by Permodalan Nasional Bhd (PNB). Its key businesses are investment banking, development finance and asset management.

AFB is almost half the size of MIDF in terms of assets. The Islamic lender had an asset base of RM3.4 billion as at end-March this year, while MIDF’s was RM6.03 billion.

Meanwhile, AFB CEO Datuk Mohamed Azahari Kamil’s contract comes to an end this week, on Aug 20. Sources say it is unlikely to be renewed given the latest developments. He has helmed the lender for seven years.

Azahari, when contacted, declined to comment when asked about the talks with MIDF.

“As a member of the management team, I am not able to comment on issues relating to shareholders,” he says. On his contract, he says it is up to the shareholders to decide if he should stay on.

Prior to joining the bank in August 2008, Azahari had been the head of AmanahRaya Investment Bank Ltd Labuan. MIDF group managing director Datuk Mohd Najib Abdullah was not immediately available for comment.

AFB’s reasons for wanting to sell are not clear but industry sources say its largest shareholder, Qatar Islamic Bank (QIB), is keen to make an exit because of disagreements with the bank’s other shareholders.

According to AFB’s website, QIB holds a 66.67% stake in the local lender. Its other shareholders are Saudi Arabia’s RUSD Investment Bank Inc (16.67%), Yemen’s Tadhamon International Islamic Bank (10%) and Financial Assets Bahrain WLL (6.67%).

“There is some dispute among the shareholders, so they probably just want to get out entirely. It’s not like they are getting strong returns from the bank anyway,” a source remarks.

AFB’s FY2014 directors’ report and audited financial statements mention the dispute, without providing details. “During the year, there have been disagreements between the shareholders arising from the differences in interpreting the Shareholders’ Agreement, Deed of Adherences and the Company’s Articles of Association, which have been referred to the High Court of Malaya. At present, one appeal remains outstanding at the Court of Appeal. To date, the Court of Appeal has not scheduled a date for the hearing of the said appeal.”

There have been no updates on the matter since then.

It is understood that one of the reasons QIB may be unhappy is that it does not have control over AFB despite its large shareholding. In QIB’s financial statements for the six months ended June 30, 2015, it says, “The bank does not have ‘control’ over AFB … due to certain provision of the shareholders’ agreement. Hence, AFB continues to be accounted for as an associate.”

On May 1 last year, it raised its stake in AFB by an additional 10% to 60% (at that time) for QAR61 million. Its share of AFB’s results in FY2014 was QAR8,457 — a paltry sum when set against its own net profit of QAR1.6 billion that year.

Interestingly, AFB is the second foreign Islamic bank that may be selling its operation.

Earlier in May, KFH’s Kuwaiti parent said it was considering “options” regarding its investment in Malaysia. It hired Credit Suisse to advise on its options, which include a potential sale of KFH.

“It’s really no surprise that they are thinking of selling. After all this time, the Middle Eastern banks here haven’t really made great strides in Malaysia. Competition is really tough and the shareholders aren’t getting the kind of returns they want,” a banker tells digitaledge Weekly.

AFB, which had initially focused on lending to small and medium enterprises, in later years turned its focus to government-linked companies (GLCs), which helped boost its profitability. GLC funding accounts for about 94% of its financing assets, which stood at RM1.74 billion in FY2014.

MIDF, once a listed entity before PNB took it private, made a net profit of RM131.38 million in FY2013, its website shows. There was no information on its FY2014 results, but its net profit stood at RM24.35 million for the first quarter of FY2015.

The biggest contributor to its earnings is its investment banking business, via MIDF Investment Bank Bhd.

This article first appeared in digitaledgeWeekly, on August 17 - 23, 2015.