This article first appeared in Forum, The Edge Malaysia Weekly on October 21, 2024 - October 27, 2024

It came as a surprise to many when Diona Teh Li Shian announced that her family would reduce its stake in Public Bank Bhd (KL:PBB) to 10% over the next five years. While the timing of the announcement was unexpected, it was a strategic move.

It effectively answered the question as to how the Teh family would comply with the requirement of the Financial Services Act 2013 (FSA), which has restrictions on the shareholding of family companies and individuals in financial institutions. It also put to rest any speculation over the shareholding of the bank’s largest shareholder.

Diona’s late father, Tan Sri Teh Hong Piow, had a 23.41% stake in Public Bank that is worth more than RM20 billion. The block of shares is held through Consolidated Teh Holdings Sdn Bhd and the estate of the late Teh.

Even before Teh passed away, there had always been questions about who would succeed him and what would happen to his block of shares in the bank he founded.

In fact, since 2013, when the FSA came into effect, Bank Negara Malaysia has made it clear that shareholdings in banks are restricted to 20% for institutions and not more than 10% for individuals.

The exceptions to the rule are individuals who held more than 10% before the FSA came into effect by virtue of having founded the financial institution. Apart from Teh, the others who fall into this category are Tan Sri Azman Hashim of AMMB Holdings Bhd (KL:AMBANK) and the cigar-smoking Tan Sri Quek Leng Chan of Hong Leong Bank Bhd (KL:HLBB).

The three are known as doyens of the local banking sector who managed to lead their financial institutions through four recessions since the 1980s and one major banking consolidation exercise in 1999/2000.

They were allowed to hold on to their stakes and given exemptions in what was known as the “grandfather rule”. But the rule applies only to them and not to their children or successors.

Azman has 11.8% in AmBank while Quek holds 64.5% in Hong Leong Bank through Hong Leong Financial Group Bhd (KL:HLFG).

The Teh family’s disclosure could well set the template for the stakes held by Azman and Quek, who have to ensure that their successors comply with the FSA.

Of the two, AmBank has less of a problem because Azman’s stake is just 1.8% above the 10% threshold. All he needs to do is seek Bank Negara’s approval to maintain the stake at 10% and dispose of the excess. Alternatively, his shares can be a merger block for any suitor.

As for Quek, the family’s interest can go up to 20% as the stake is held through HLFG, which is an institution. But it is difficult for HLFG to trim its stake in the bank unless there is a merger, to which Hong Leong Bank is no stranger. In 2014, a research report paired Hong Leong Bank with Public Bank on the rationale that the former wanted a bigger platform and the latter could have succession problems.

Coming back to Public Bank, being able to keep a 10% stake can mean a lot for the Teh family as the bank was founded by their father. And any family member or their representative can seek a board seat provided Bank Negara gives its approval. This can be seen at RHB Bank Bhd (KL:RHBBANK) where OSK Holdings Bhd has a 10.3% stake and its executive chairman Tan Sri Ong Leong Huat sits on the board.

A 10% stake in a bank represents more power than it may appear. It can block or facilitate a potential takeover. This is because in a merger exercise between financial institutions, one bank takes over another through the acquisition of assets and liabilities. In reality, there is no such thing as a merger of equals.

Under the acquisition of assets and liabilities method, the scheme requires 75% shareholder approval and not more than 10% opposing it, which means a 10% block can be an obstacle to a takeover. So while the stake may be small, it is meaningful in a bank, especially if it comes with board representation, which means that the entity and its representative have passed Bank Negara’s “fit and proper” test.

But that 10% interest can also turn out to be inconsequential.

Banks are highly regulated and the central bank keeps a close eye on board changes as it does not allow the banks to fail. The rules have become even more stringent after the 1998 Asian currency crisis. To Bank Negara’s credit, it has ensured that the banking system has not been in danger of a systemic risk as a result of the failure of any bank then.

Since 2000, there have been instances of parties with more than a 10% stake that still had difficulty exerting control over the bank as the shareholder did not pass the “fit and proper” test.

In 2005, when the UBG Group of Sarawak was a substantial shareholder in RHB Capital Bhd, which then controlled RHB Bank, Datuk Seri Sulaiman Abdul Rahman Abdul Taib had to wait eight months before the central bank gave him the green light to be a board member of RHB Capital. The following year, Sulaiman resigned and UBG subsequently disposed of its stake in the bank.

In 2007, Hong Kong fund Primus Pacific Partners bought a 20.2% stake in EON Capital Bhd at a premium. Three years later, there was a boardroom battle, with Hong Leong Bank coming in to acquire EON Bank.

Eventually, Hong Leong Bank took over EON Bank, and approvals from the central bank were relatively faster than normal.

Aabar Investment PJS held 25% in RHB Capital (then the holding company of RHB Bank) in 2011. The investment arm of the Abu Dhabi government wanted to sell its block of shares. In an unprecedented move, both CIMB Group Holdings Bhd (KL:CIMB) and Malayan Banking Bhd (KL:MAYBANK) received approval from Bank Negara to negotiate with Aabar.

It was unprecedented as Bank Negara does not allow a bidding war for any bank. The deal was finally called off and Aabar sold off its interest in RHB Bank in 2019.

In the next five years, the family of the late Teh will dispose of some 13.4% in the bank to employees, directors and shareholders through a restricted offer for sale. It will cause an overhang of Public Bank shares in the short term but will be good for the bank in the longer term.

Public Bank’s hallmarks are its conservative lending, a strong retail franchise with a good following among small and medium enterprises and a steady group of shareholders with an appetite for consistent dividends. And with the Teh family committed to keeping a 10% stake, the future of the bank remains solid, even if speculation of an eventual merger with another bank is unlikely to go away.

M Shanmugam is a contributing editor at The Edge

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.