This article first appeared in The Edge Malaysia Weekly on February 5, 2024 - February 11, 2024

WITH banks increasingly chasing business in Sarawak, where the deal pipeline is buoyant, Affin Bank Bhd is seen to be given a leg-up, with the state government soon expected to become a significant shareholder.

Bank Negara Malaysia is understood to be mulling the Sarawak government’s proposal to raise its holding in the country’s second-smallest of eight banking groups by assets to around 30%, from 4.8% currently — a move that would propel it to become the largest shareholder.

The Armed Forces Fund Board (LTAT) is currently the largest shareholder, with a 28.79% stake, followed by the Bank of East Asia Ltd, with 23.93%, and LTAT’s wholly-owned unit Boustead Holdings Bhd, with 20.02%. 

Sarawak plans to acquire Boustead Holdings’ entire 20.02% stake as well as “a bit of LTAT’s”, The Edge reported on Jan 31, citing a source. This is, however, subject to Bank Negara’s approval.

It is understood that the parties, which have agreed on a price that is a “win-win” for each side, had written to Bank Negara in January seeking its approval for the proposed transaction. The approval is pending, says a source.

While some in the market wonder whether an institution would be able to hold as much as 30% of a bank under current banking rules, a legal expert whom The Edge spoke to points out that the Financial Services Act (FSA) 2013 — under which banks fall — is silent on shareholding limits for institutions. (Under the previous Banking and Financial Institutions Act 1989, institutional shareholders were subject to a limit of 20%, with anything beyond that then left to the central bank’s discretion.)

Sue Wan Wong, a partner in the corporate, commercial and securities practice group of Wong & Partners, says while FSA 2013 sets out shareholding limits for individuals — a person cannot hold more than 10% of a bank — it does not specify limits for institutional shareholders.

It does require a shareholder to obtain Bank Negara’s approval, however, to acquire any multiple of 5% stakes in a bank, she adds. Elaborating further, she says if a shareholder wants a controlling stake in a bank (that is, a stake of more than 50%), then it would need the approval of the Ministry of Finance, although the application would still go through Bank Negara.

For now, it remains to be seen whether Sarawak would want to have a controlling stake in the bank further down the road.

Analysts whom The Edge spoke to say banks have in recent times been looking to position themselves much more strongly in Sarawak. It is considered a sweet spot, as it is a relatively untapped market for the banks compared with the rest of the country’s economic regions.

An analyst points out that Sarawak’s economy is growing at a faster rate than any state in the peninsula. “Banks stand to benefit from the opportunity to finance the growth of Sarawak, which has a large portfolio of infrastructure development projects in the pipeline. It has set aside a development budget of RM9 billion for 2024, its biggest ever. The state is projecting a 2024 GDP (gross domestic product) growth rate of 5% to 6%, which would be faster than [our forecast of] 4.4% growth for the country,” he says. Malaysia’s official GDP forecast is between 4% and 5%.

Renewable energy and the construction of coastal roads are expected to be an immediate area of focus in Sarawak.

“Many banks are seeing the potential in Sarawak becoming a high-income economy in the long run, and want to get in on the game early,” another analyst comments.

It is not just big lenders such as Malayan Banking Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd that are looking to strengthen their position there, but also the smaller ones such as Alliance Bank Malaysia Bhd.

Analysts believe that, being backed by the state government, Affin Bank may have an advantage over the other lenders in terms of business opportunities there. Several note that Sarawakians, being loyalists, are likely to bank with a state-owned lender.

Affin Bank CEO Datuk Wan Razly Abdullah Wan Ali says the bank is eyeing a bigger market share in the state, with plans to provide financing and financial advisory, among others. “For big infra projects, we normally [tap] the capital markets, say, through a bond issue. That’s why the investment bank is important for us,” he says, when asked about the lender’s capability in financing big projects, given its relatively smaller balance sheet.

For a start, the bank aims to triple the number of branches there from six currently, he says, without providing a timeline for doing so. It also plans to have what it calls a mobile financial centre — essentially, a bank on wheels with an in-built ATM (automated teller machine) — set up in the more rural areas.

Kenanga Research believes Sarawak has an “addressable” population of up to three million concentrated between its key cities of Kuching, Sibu, Bintulu and Miri.

It notes that as at 3QFY2023 (ended Sept 30), Sarawak-based accounts comprised RM2.8 billion, or 4%, of Affin Bank’s total loan book. “A larger presence could drive its books share here, albeit not likely to surpass its KL (22%) or Selangor (31%) portfolios. On the flip side, we note that the group has been aggressive with its issuance in debt capital market products, which may benefit from the state’s participation,” it says in a Jan 23 report.

Sarawak Premier Tan Sri Abang Johari Tun Openg, who was in Kuala Lumpur last week as the guest of honour at the bank’s market outlook event, told reporters that Sarawak needs a bank to aid its small and medium enterprises (SMEs) and its own business activities.

Asked during a press conference why Sarawak, unlike other states, was keen on owning a bank, Abang Johari pointed out that as many as six banks originated from Sarawak, including Bank Utama and Wah Tat Bank.

“When there was a policy [by the federal government] to merge all these banks [post-Asian financial crisis], our banks were all swallowed by the big banks, if I can use the word ‘swallowed’. We feel like we need a bank in order to boost our SMEs and business activities in Sarawak,” he said.

CGS-CIMB Research says having Sarawak as a key shareholder of Affin Bank would be positive for the bank, as it could catalyse its business growth in the state through closer working relationships with the Sarawak government.

“The growth could be in the areas of business loans (ranging from SME to corporate loans), investment banking deals, treasury and ESG-related businesses (for financial services),” it says in a Jan 17 report.

It believes, however, that it will take time for the bank to realise the benefits.

“It will take time (more than one year) for any positive benefits to materialise, as Affin Bank needs to formulate a plan, expand its network and strengthen its operations in Sarawak. To achieve this, [it] would have to incur additional costs (larger number of branches and employees in Sarawak) while revenue would only increase gradually over time,” it says.

As such, CGS-CIMB cut its investment call on Affin Bank to “reduce” from “add”, but maintained its target price at RM2.26.

Affin Bank’s share price has risen sharply since Dec 19 last year, by 30.2%, to close at RM2.63 on Jan 31 as investors bet the lender would benefit from the Sarawak government becoming a significant shareholder. At that closing price, the lender had a market capitalisation of RM6.17 billion.

At RM2.63, Affin Bank is valued at a price-to-book of 0.55 times, the lowest among its peers, despite the recent share price rally.

Sarawak, via its investment arm State Financial Secretary Sarawak, bought its current stake in Affin Bank in April 2023 for RM1.97 per share, or RM221.74 million in total. 

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