This article first appeared in The Edge Malaysia Weekly on March 4, 2024 - March 10, 2024

AFFIN Bank Bhd’s second-largest shareholder, Bank of East Asia Ltd (BEA), has an eye on selling its 23.93% equity interest in the Malaysian lender but is in no hurry, sources say.

“I believe they want to sell their stake in Affin Bank to unlock capital,” a source tells The Edge.

Hong Kong-based BEA needs to be capital-efficient, given its exposure to mainland China, which continues to be mired in a property crisis and is experiencing slower economic growth. The lender made significant provisions for bad loans there last year.

“They are on the lookout for buyers, albeit not actively. They’ve seen Affin Bank’s share price run up in recent months, which is good, but I think they have a price level at which they will let go. They’re waiting, hoping, that someone can come along as a buyer,” the source says.

“The buyer would have to have deep pockets, and those are hard to come by, but there could always be some party that could be looking from afar.”

According to another source, BEA has been having casual chats with some foreign banks, sussing out their interest in potentially buying its stake in Affin Bank.

The comments come amid much curiosity in the market as to what BEA plans to do with its equity interest in Affin Bank now that Sarawak is poised to become a significant shareholder in the country’s second-smallest of eight banking groups.

On Jan 31, The Edge reported, citing sources, that Sarawak intended to raise its shareholding in Affin Bank to around 30% from 4.8% currently, which would make it the banking group’s largest shareholder. At present, the biggest shareholder is the Armed Forces Fund Board (LTAT), with a 28.79% stake.

It is understood that Sarawak plans to acquire Boustead Holdings Bhd’s entire 20% equity interest in Affin Bank as well as part of LTAT’s stake in a bid to raise its shareholding to just below the 33% level at which a mandatory general offer would have to be triggered. The proposed plan is pending Bank Negara Malaysia’s approval.

Affin Bank’s share price has gained 24% on active volumes in the first two months of this year as investors bet that Sarawak’s impending entry as a significant shareholder will add value to the bank.

Based on the Feb 29 closing price of RM2.58, BEA’s 23.93% equity interest in Affin Bank is worth RM1.45 billion. The share price peaked at a more than five-year high of RM2.65 on Feb 21.

According to sources, BEA officials met with Sarawak’s top guard, including state premier Tan Sri Abang Johari Openg, in Kuala Lumpur in late January. In that meeting, the BEA officials conveyed that BEA was happy to continue as a shareholder in Affin Bank alongside Sarawak.

“For them, Sarawak coming in creates value for the bank, so that will push the share price up. I think it hasn’t triggered the share price threshold at which they are willing to sell,” one of the sources says. “They are under no immediate pressure to sell. It’s more about reaching the right price level.”

BEA said it had no comment when contacted by The Edge via email.

Two weeks ago, BEA co-CEO Adrian Li was reported as saying that the bank’s impairment losses on financial instruments for the whole of 2023 reached HK$5.5 billion (RM3.33 billion), of which about 82% of those provisions were related to the Chinese commercial property sector. The bank’s net profit for the year fell 5.5% to HK$4.12 billion, falling short of the HK$5.53 billion expected by analysts polled by Bloomberg.

The lender said it would continue to shrink its overall exposure to troubled Chinese property developers. Its mainland commercial real estate loans accounted for about 7% of total lending as at end-2023 compared with 9% a year earlier.

“We believe BEA’s asset quality and credit costs will remain under pressure over the next two years. This is because the group has a sizeable exposure to property development and investment loans. These accounted for about 30% of total loans at end-2023. The effectiveness of mainland China’s property stimulus policies is uncertain, in our opinion, and demand in Hong Kong’s property market is weakening,” S&P Global Ratings said in a Feb 22 report.

BEA’s largest shareholder is Sumitomo Mitsui Financial Group Inc, with a 21.69% stake. Interestingly, Tan Sri Quek Leng Chan, the tycoon behind the Hong Leong group of companies, which includes Hong Leong Bank Bhd, is also a major shareholder of BEA, with a 16.45% equity interest via the Guoco group.

BEA has certainly had a long history with Affin Bank. From being a marginal shareholder in 2005, it went on to substantially raise its holding in the group — then known as Affin Holdings Bhd — in October 2007 by taking up a 15% stake, or 193.2 million shares, via a placement, at an issue price of RM2.58, or RM498.46 million in total. By February 2008, it held a 20.47% equity interest in the group.

While BEA has benefited from the recent share price surge and annual dividends over the years, observers note that the depreciation of the ringgit would have caused them to lose some value.

Last Thursday, Affin Bank reported a net profit of RM39.54 million for the final quarter of the financial year ended Dec 31, 2023, which was more than double the RM16.56 million it made in the same period a year earlier, thanks to a sharp decline in provisions and lower taxes. For the full year, however, profit fell 66% to RM402.19 million.

It recently transitioned to a new strategy codenamed AX28, from A25 previously, under which it aims to reach a profit before tax of RM1.2 billion by end-2025 and RM1.8 billion by end-2028, from just RM518 million last year.

As at its Feb 29 closing price of RM2.58, it was valued at RM6.05 billion. 

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