This article first appeared in The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

RHB Bank Bhd (KL:RHBBANK) chief Mohd Rashid Mohamad is periodically asked whether the lender is considering any mergers and acquisitions (M&A). “I knew you were going to ask about that,” he laughs, when The Edge raises the topic in a recent interview.

RHB is often viewed as a likely M&A candidate because its largest shareholder, the Employees Provident Fund, which owns a 40.24% stake, also holds major stakes in other banks, including AMMB Holdings Bhd (14.47%) and Malaysia Building Society Bhd (57.45%). Its second-largest shareholder is OSK Holdings Bhd (KL:OSK), with a 10.24% stake. Retirement Fund Inc (KWAP) holds 5.94%. OSK is led by savvy businessman Tan Sri Ong Leong Huat, who sits on the bank’s board.

“This question [on M&A] keeps coming back to me, and the answer is no, we are not looking at any M&A opportunities now. But, of course, should the opportunity arise, it’s only fair for me to look at it. But is that my preference or my main objective now? It’s not,” he says.

In a wide-ranging interview, Rashid, who turns 57 this year, talks about the group’s improving prospects, its overseas businesses and more on M&A. The following are excerpts from the interview.

The Edge: You seem more upbeat about the first quarter, but we notice you hesitate to say that the worst is over for RHB.

Mohd Rashid Mohamad: If you had interviewed me two months ago, maybe my tone would be slightly different. What we didn’t expect is the inflation scenario in the US and potentially here [in Malaysia], and also, there are some geopolitical tensions. So, these create some uncertainties within the financial market and the industry … that I may not be able to say that the worst is over.

If the tension between Iran and Israel is contained, and there’s no involvement of G7 or other countries, then this perhaps will have less of an impact on the industry. But, the main concern is the expectation of [interest] rate cuts in the US, which I think will happen, but the timing and quantum, now that’s key. We believe Bank Negara will stay put on the OPR (overnight policy rate) this year and remain accommodative to support economic growth.

Your relatively low loan loss coverage (LLC) ratio is a point of concern for some analysts.

Coming out of the pandemic, we grew quite substantially in the SME (small and medium enterprise) space. The government introduced a government-guarantee scheme known as Syarikat Jaminan Pembiayaan Perniagaan Bhd (SJPP) for micro SMEs and SMEs in 2009 where the bank would give out loans, of which a significant portion is guaranteed by the government. So, some of these loans have turned bad. Regardless, about 80% of our SME portfolio is secured, including government-guaranteed loans under SJPP. Hence we do not need to make provisions and that partly reduces our LLC. A back-of-the-envelope calculation shows that if we were to take into account the collateral portion of all impaired loans, including guaranteed portion, our LLC [excluding regulatory reserves] last year is as good as 139% [as opposed to the reported 71.7%].

But wouldn’t the same argument apply to other banks as well, and yet their LLC levels are not as low?

This is where, I don’t know if you realise, we are one of the major contributors to the SJPP scheme. Hence when the loans turn bad, they go into impairment, but provisions are not needed — so LLC is reduced.

So, you’re saying you’re hit more than the other banks because of your heavy participation in this scheme?

Definitely. We are one of the biggest contributors. For us, it’s about playing our role in supporting the SMEs and micro SMEs, because they may not be able to easily get loans from the bank without the government guarantee. We will continue to support them and participate in the government initiatives. So, that’s why, if you ask me, would I worry? Of course, I worry but what comforts me is that we are now seeing impairment normalising towards the pre-pandemic level.

So, are you expecting the LLC to move up this year?

There is always an intention for us to bring up the LLC.

RHB has retreated from a couple of its overseas markets in the last few years, the most recent being Vietnam. What’s the thinking there? Are there plans to exit more markets and just concentrate on a few?

Our presence outside Malaysia is not big; if you look at our TWP24 strategy, the focus is mainly Singapore and Cambodia. We want to be realistic about our presence in [the region]. We exited some of the stockbroking businesses outside Malaysia due to the fact that the stockbroking market landscape has changed. There is a lot of digitalisation and a race-to-zero kind of fee is happening. Without scale, it is very difficult to compete and hire good talent.

We closed the stockbroking businesses in Singapore, Hong Kong and Vietnam, and what we have left is Indonesia — which we like because the licence allows us to look at capital market activities — as well as Thailand and Cambodia.

As for commercial banking, we have branches in five countries — Singapore, Cambodia, Laos, Thailand and Brunei.

So, no plans to exit any of these?

Continuous assessment is being done. If, let’s say, we don’t see any opportunity for our business to grow, especially in a very difficult market, that’s where we will reconsider. But, for now, I think that’s about it in terms of exits.

Thailand will be issuing digital bank licences, and applications will open soon. Are you looking at applying for a licence there?

No. We want to focus on growing our digital bank in Malaysia with our partner [Boost Holdings Sdn Bhd].

Would you consider going into commercial banking in Indonesia? Are you looking for opportunities?

No. I believe it’s too expensive now to go into Indonesia. We have looked at it, but it doesn’t make sense for us to be there for now because the entry-level cost is very high.

On asset quality, where do your concerns lie?

The SMEs continue to be one of our areas of focus. Despite our growing quite significantly in the SME space, we are quite conscious of the fact that asset quality is key. That’s why sectors and states are important considerations before we start lending [to them] in a big way.

Retail has been holding steady. We have less concern over the retail portfolio.

Overseas, we have provided for most of it. But there is a lot of uncertainty lingering around this overseas business of ours. What’s key, what we want to see is stronger growth from China. China’s slower growth definitely has had a great impact on our customers in this region.

So, [the concern is mainly] SMEs and overseas.

What about corporate?

Corporate, we are good; it’s contained within the target we look at. From a GIL (gross impaired loan) perspective, corporate has been holding steadily; we don’t see much pressure. It’s one or two selected customers of ours that have some issues and also caused our LLC to be lower. But, again, these are fully collateralised.

What is RHB Bank’s stance in terms of M&A — is it something that you think is inevitable for the bank? It’s a mid-sized bank, so there’s always talk.

If you look at it from an industry perspective, and you look at how competitive and crowded this market is, with a population of just 30 million, M&A does seem to make sense, right? But whether it’s timely for us, no. Not for RHB. Maybe for other banks, I don’t know; but, for us, no. I still believe we are undervalued. We will need to continue to improve our fundamentals and strengthen the group’s performance before we can consider possibilities. Otherwise, it’s not fair for the shareholders.

When you look at the TWP24, and even moving forward in our next three-year plan, our growth will be organic. We will focus on what we can grow within the organisation.

So, you’re not looking for prospective partners. But, it’s also hard for you to be so definitive about it because you have shareholders who may want to sell.

No, we are not looking for prospective partners at this juncture. There are three representatives of shareholders sitting on the board. Two from EPF and one from OSK. So, they are well represented.

In your view, are they also on board for RHB to continue on an organic growth path?

Yes, that’s correct. So far, there is no pressure to consider an M&A in the immediate future. For us, it’s business as usual.

When does your contract end? Yours is a two-year contract?

Mine is a three-year contract, until the second quarter next year.

For your upcoming three-year plan, you said you were putting a lot more emphasis on digital and technology. How much investment are you likely to set aside?

For TWP24, that RM400 million that we have put aside is for automation and modernisation over three years. Going into 2025 and beyond, we do not foresee ourselves reducing our digital and IT investments. I think that type of investment is key for us.

Your HQ in Jalan Tun Razak is an old building. Are you looking to move, like some of the other banks, into new, green buildings?

We are trying our level best to address the GHG emissions arising from our own internal operations. We have achieved 43% in FY2023 and are targeting 45% by the end of this year. Whatever we can, we will do it. But you are right, this is an old building and, to make it green, it will be very costly. But there’s no plan to move for now. We also don’t want to be contributing to another vacant, aged building within the city. We own the building; it has been here since 1995.

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