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

NEWS that the Sarawak government is keen to increase its investment in Affin Bank Bhd to about 30%, from 4.8% currently, has sparked questions about what may transpire with its second-largest shareholder, Hong Kong-based Bank of East Asia Ltd (BEA), which has 23.93% equity interest in Affin.

When contacted by The Edge on whether a sale of its stake was being mulled, BEA replied, “We have no comment.”

To put things into perspective, for Sarawak, increasing its stake in Affin Bank is not only about diversifying its portfolio but also a strategic move to gain more control over the bank’s operations. This move to increase its stake, held via the State Financial Secretary Sarawak, to below the 33% threshold that would trigger a mandatory general offer is seen as a tactical one.

To recap, The Edge, quoting sources, reported last week that Sarawak was looking to increase its stake in Affin Bank from just below 5% to 30%, and could acquire a chunk of Lembaga Tabung Angkatan Tentera’s (LTAT) direct stake of 28.79% in Affin Bank. LTAT’s wholly-owned Boustead Holdings Bhd, meanwhile, has a 20.02% stake in the banking group.

In April last year, the State Financial Secretary Sarawak acquired 112.56 million shares, or a 4.95% stake, in Affin Bank for RM221.74 million, or RM1.97 per share. Acquiring the remaining 591.39 million shares to make up the 30%, at the current market price of about RM2.50 per share, would entail the state forking out an additional RM1.48 billion, sans a premium. So, after spending RM1.7 billion on 30% of Affin Bank, Sarawak is likely to want some certainty of control and may look to friendly parties to acquire shares and have at least a 51% stake in the bank.

“So, chances are parties friendly with the state could look to buy out BEA and thus gain control of Affin Bank. This way, it will not trigger a general offer but the state and a friendly party or parties will have control of the banking group [Affin Bank],” says one market watcher.

In Affin Bank’s FY2005 annual report, BEA had a 1.24% stake and raised it to 3.97% in FY2006. In October 2007, via a placement, BEA took up a 15% stake, or 193.2 million shares, at an issue price of RM2.58, for a total of RM498.46 million.

Over the years, Affin Bank has consistently paid out dividends. A back-of-the-envelope calculation indicates that it has dished out RM1.57 per share in dividends since 2008, which would have substantially reduced BEA’s cost of investment.

At Affin Bank’s closing price of RM2.50 last Friday, BEA’s 23.93% stake had a market value of about RM1.4 billion.

So, will Sarawak, via friendly parties, secure additional shares in Affin Bank and manoeuvre to have control of the bank? Then again, will BEA decide to stay and ride the Sarawak wave, which is likely to lift Affin Bank as well?

“After all, BEA did ride with LTAT and Boustead for a decade … so why not hang on, refrain from selling and ride along with Sarawak?” another market observer asks.

BEA had a market capitalisation of US$3.02 billion (RM15.09 billion) and assets of US$111.3 billion (about RM525 billion) at end-June 2023, with a presence in Hong Kong, China, the UK and the US.

Affin Bank has been doing well financially. For the nine months ended September last year, the second-smallest bank in the country chalked up a net profit of RM362.66 million on the back of RM1.5 billion in revenue. In the previous corresponding period, it made a net profit of RM1.16 billion from RM2.73 billion in revenue.

Earnings in 2022 were given a shot in the arm with the sale of its 68.35% stake in Affin Hwang Asset Management to CVC Capital Partners for RM1.54 billion. At the closing price of RM2.50 last Friday, Affin Bank had a market capitalisation of RM5.87 billion and a gross dividend yield of 3.11%. 

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